Exploring the relationship between corruption, income inequality and informal sector in developing countries: a panel quantile approach

Abstract

PurposeThis paper aims to explore the impact of corruption (CP) on income inequality (IN) by considering the size of informal sector (IFS) at different levels of percentiles.Design/methodology/approachThis paper uses a panel quantile regression approach for a sample of 50 developing countries. The study also applies panel co-integration (Kao residual co-integration test) in order to examine the long-run relationship between CP and IN.FindingsThis paper using a panel quantile regression approach shows that the high incidence of IFS in an economy marginalizes CP's positive effect because it works as a source of poor peoples' livelihood and skillful individuals. The spread of IFSs in the developing economies may raise earnings among groups and individuals who remain unemployed. Moreover, the results show that CP creates asymmetry in income distribution; fascinatingly, the asymmetric income distribution is high when CP is at higher percentiles.Research limitations/implicationsDue to non-availability of IFS, we restrict our analysis up to 50 developing countries.Practical implicationsCP devastates the effectiveness of institutions over time. Therefore, the government should have to take bold steps to reduce CP in society. Another policy implication of this study is that the government should reduce CP to decrease IN in less developing countries. Moreover, to increase the net base, the authorities need to bring IFS under the umbrella of regulation to avoid inequality in society. In developing economies, a higher part of labor force is related to IFS; therefore, our findings suggest a dire need to reduce labor exploitation in IFS. The policymakers can reduce labor exploitation by reducing the size of IFS, which ultimately reduces IN.Social implicationsOn the basis of the authors’ findings, this paper further suggests that it is mandatory for government to reduce CP in order to reduce IN. Moreover, to reduce IN, one needs to reduce the size of IFS.Originality/valueThis study is unique as it is the first that examined the role of IFS in establishing the effect of CP on IN for developing countries at different percentiles.