In recent decades, the quality of governance has been recognized as a fundamental factor in explaining differences in regional economic growth. Disparities in governance quality across Iranian provinces—rooted in differences in state administrative capacity, the degree of marketization, and the level of rule of law—have led to heterogeneous patterns of economic performance and regional development. This study develops and constructs a composite provincial index of good governance and investigates the relationship between governance quality and economic growth, as well as the moderating role of governance within the framework of the resource curse hypothesis over the period 2011–2022.

To account for the dynamic nature of economic growth and to address potential endogeneity issues, the analysis employs the Generalized Method of Moments (GMM) estimator. The empirical results reveal a nonlinear, U-shaped relationship between governance quality and economic growth. In other words, at low levels of institutional quality, marginal improvements in governance do not produce a significant effect on economic growth. However, once governance surpasses a critical threshold, further improvements in institutional quality significantly enhance the economic performance of provinces.

The results also indicate that dependence on oil resources exerts, on average, a negative effect on provincial economic growth, a finding consistent with the resource curse literature. Nevertheless, the positive interaction between governance quality and oil dependence suggests that improvements in institutional quality can mitigate part of the adverse consequences associated with reliance on oil revenues.

Threshold estimations further show that the critical level of the governance index across all valid specifications lies within a relatively narrow range and is generally located in the second quartile of the provincial governance distribution. This finding implies that even achieving a moderate level of institutional quality can partially offset the negative growth effects of oil dependence and facilitate a more efficient utilization of natural resources.

Based on these findings, strengthening the institutional capacity of local governments, improving transparency and accountability in governance processes, enhancing the institutional environment for economic activity, and promoting marketization institutions constitute key policy priorities for improving provincial economic performance. Moreover, moving toward greater economic diversification and improving the institutional framework governing oil revenue management can play an important role in reducing the vulnerability of regional economies to fluctuations in oil revenues and in supporting a more sustainable growth trajectory.