Investigating the Effect of Income Inequality on Corruption: New Evidence from 23 Emerging Countries

This paper studies the impact of income inequality on corruption, a research problem that is often overlooked by the literature. The existing literature offers a detachment view in which controls of corruption decrease income inequality. However the existence of a large informal sector in emerging countries may reverse the causality, i.e., inequality effects corruption. Using a balanced panel data for 23 emerging countries from 1996 to 2017 fitted in static mehtods pooled ordinary least square, fixed effect, random effect, IV regressions, and dynamic difference and system generalized method of moment's approch, we find that higher inequality levels lead to higher control of corruption. For different income groups, we find a U-shaped relationship for the high income emerging countries while the results of system GMM confirm the inverted U-shaped relationship for upper middle income emerging panel countries. Furthermore, the study also finds the uni-directional causality between corruption and income inequality.