Corruption Clubs: Endogenous Thresholds in Corruption and Development
This paper examines the effect of external shocks on urban poverty in a two-household (rich and poor) intertemporal optimizing model of an open economy with segmented labor markets. Skilled and unskilled labor are used in the formal sector, whereas only unskilled labor is used in the informal economy. Using the minimum wage in the formal sector as the poverty line, various poverty indicators are defined and computed. The analysis shows that the extent to which an increase in the world risk-free interest rate affects the incidence and depth of poverty depends crucially on the wedge between consumption and product wages in the formal economy.
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