Corruption, institutional quality, and offshoring: How do they affect comparative advantage, inter‐country wage inequality, and economic growth?

Abstract

AbstractWe analyze whether, due to the effects on corruption, institutional quality, and offshoring affect comparative advantage, income inequality between countries and economic growth. We start by developing a theoretical model of endogenous R&D growth for an integrated area with two representative countries that differ in the economic development level. Then, we estimate an econometric model with panel data, considering combinations of 14 different countries, between 2000 and 2017. We show that an improvement in offshoring increases the comparative advantage of developing‐South countries and decreases the wage gap between developed‐North and South countries. In turn, an improvement in institutional quality increases the comparative advantage of the North and widens the wage gap between countries. Whatever the improvement, there is always an increase in the world economic growth rate. Thus, all countries can improve their position in international trade, labor market, and economic growth through the conduction of policies that reduce corruption and, respectively, increase the quality of institutions and the attractiveness for the offshoring.