Is there a trade-off between income inequality and corruption? Evidence from Latin America

Abstract

Conventional economic thinking says corruption and income inequality are positively related. In contrast, this study finds that lower corruption is associated with higher income inequality. The finding of a trade-off is not unexpected in the context of Latin America, for two reasons. First, Latin America has a large informal sector and corruption-reducing polices impose a transaction cost on this sector whose members are among the poorest. Second, redistributive measures, promoted by corrupt elements in society, are often cut back with institutional reform and this serves to worsen inequality. The results imply that corruption-reducing policies aimed at lowering inequality may be misguided.

Financial Development and Income Inequality at Different Levels of Institutional Quality

“…The strength of institutions tends to improve the income distribution (Chong and Gradstein 2007;Dincer and Gunalp 2012;Dobson and Ramlogan-Dobson 2010). Inflation has been found to increase income inequality (Ang 2010;Beck et al 2007;Dobson and Ramlogan-Dobson 2010;Hamori and Hashiguchi 2012). Thus, the coefficients of β 2 , β 3 , and β 5 are expected to be less than zero, whereas the coefficient of β 4 is expected to be greater than zero.…”

“…We control for human capital or educational attainment because Downloaded by [Northwestern University] at 08:21 25 March 2015 these factors have been found to affect income inequality (Ang 2010;Beck et al 2007;Huggett et al 2006). The strength of institutions tends to improve the income distribution (Chong and Gradstein 2007;Dincer and Gunalp 2012;Dobson and Ramlogan-Dobson 2010). Inflation has been found to increase income inequality (Ang 2010;Beck et al 2007;Dobson and Ramlogan-Dobson 2010;Hamori and Hashiguchi 2012).…”

Effects of International Financial and Energy Sanctions on Iran's Informal Economy

“…Several studies for the Latin American countries show that the informal economy can soften the increasing effects of corruption on income inequality. 59 These studies discuss the positive role of the informal economy in reducing income inequality. Corruption per se increases the informal economy by increasing the cost of doing business in the formal economy.…”

Corruption, growth and ethnic fractionalization: a theoretical model

“…Lambsdorff 1998; Musila and Siguè 2010), on income inequality (see e.g. Dobson and Ramlogan-Dobson 2010), on the volatility of the economic growth rate (see Evrensel 2010) and on misallocation of resources (see e.g. Verdier 1998, 2000).…”