Corruption type and income inequality in Latin America

Abstract:

This paper contributes to understanding an unresolved schism between scholars who have observed that inequality increases as corruption increases and those who have found the opposite. We show that identifying different types of corruption matter in this debate. When corruption takes the form of individual-level bribery, it is related to lower inequality because it allows informal markets to survive. Yet, when corruption takes the form of bribery at the firm-level, it may be related to higher income inequality by promoting the existence of less competitive markets. Using panel-suitable Bayesian estimates of corruption and measures of experienced corruption, we find that corruption at the individual-level is related to an increase in the share of income held by the bottom 20%. Meanwhile, firm-level corruption is related to a higher share of income held by the top 10%. Furthermore, large informal markets enhance the negative relationship between individual-level corruption and inequality while higher favouritism by authorities when assigning public funds enlarges the positive relationship between firm-level corruption and inequality. We provide case studies of Bolivia, Brazil, Colombia, and Mexico to further solidify our empirical findings. Our results indicate a pressing need to develop a more precise picture of how corruption and inequality interact.

Last updated on 10/04/2018