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Informality, Corruption, and Inequality

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  • Mishra, Ajit
  • Ray, Ranjan
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    Abstract

    The paper looks at the determinants of the size of the informal sector. We argue that corruption and informality complement each other and are jointly determined by various market and non-market variables. Our theoretical model as well empirical exercises focus on wealth and income inequality as a key determinant. High degree of inequality leads to bigger informal sector. We offer several plausible channels through inequality can impact the size of the informal sector.

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    File URL: http://opus.bath.ac.uk/22127/1/1310.pdf
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    Bibliographic Info

    Paper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 22127.

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    Date of creation: Dec 2010
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    Handle: RePEc:eid:wpaper:22127

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    Related research

    Keywords: product; informal sector; corruption; differentiation; credit market; inequality;

    References

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    1. Cule, Monika & Fulton, Murray, 2005. "Some implications of the unofficial economy-bureaucratic corruption relationship in transition countries," Economics Letters, Elsevier, vol. 89(2), pages 207-211, November.
    2. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    3. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andre Shleifer, 2000. "The Regulation of Entry," Harvard Institute of Economic Research Working Papers 1904, Harvard - Institute of Economic Research.
    4. Indranil Dutta & Ajit Mishra, 2010. "Inequality, Corruption, and Competition in the Presence of Market Imperfections," Working Papers id:3256, eSocialSciences.
    5. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    6. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
    7. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, vol. 103(416), pages 119-41, January.
    8. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
    9. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
    10. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    11. Gabriela Inchauste & Mark Gradstein & Era Dabla-Norris, 2005. "What Causes Firms to Hide Output? the Determinants of Informality," IMF Working Papers 05/160, International Monetary Fund.
    12. Jay Pil Choi & Marcel Thum, 2002. "Corruption and the Shadow Economy," CESifo Working Paper Series 633, CESifo Group Munich.
    13. Matsuyama, Kiminori, 2000. "Endogenous Inequality," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 743-59, October.
    14. Chong, Alberto & Gradstein, Mark, 2007. "Inequality and informality," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 159-179, February.
    15. Sanjeev Gupta & Hamid Davoodi & Rosa Alonso-Terme, 2002. "Does corruption affect income inequality and poverty?," Economics of Governance, Springer, vol. 3(1), pages 23-45, 03.
    16. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
    17. Pinaki Bose & Luciana Echazu, 2007. "Corruption with Heterogeneous Enforcement Agents in the Shadow Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 285-296, June.
    18. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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