The interplay of financial development and water use efficiency in shaping income distribution: evidence from Europe

This paper aims to investigate the impact of water use efficiency on income inequality in European countries, exploring how financial development moderates this relationship and controlling for economic, institutional and infrastructural control variables. This study uses Method of Moments Quantile Regression on a panel data set including 32 European countries from 2000 to 2021. The analysis uses the GINI coefficient as a measure of income inequality and assesses its relationship with water use efficiency, financial development and control variables. Water use efficiency has a statistically significant negative impact on income inequality across all quantiles, suggesting that more efficient water use contributes to reducing income disparities. This effect is stronger in countries with already lower levels of inequality. Financial development unexpectedly shows a positive relationship with income inequality, potentially indicating a misallocation of financial resources across income level categories. Government efficiency and inland waterways infrastructure have inequality-reducing effects, while the rule of law augments income inequality in the European Union. This study is limited by the lack of comparable research to benchmark findings against and by potential country-specific institutional, cultural and political factors not fully captured in the model. Future research could explore the role of water efficiency technologies, the impact of climate change on water accessibility and sustainable manufacturing practices in relation to income inequality. This research addresses a significant gap in the literature by examining the impact of water use efficiency on income inequality, presenting novel insights into how water resource management affects socioeconomic disparities in European countries.