Abstract
ABSTRACTThis article explores the role of institutional quality in the trade and inequality nexus. Does corruption shape the relationship between trade and inequality through its impact on redistribution? Our answer to this question builds on the hypothesis that trade raises inequality and that governments may want to intervene through appropriate redistribution schemes that aim at taxing the gains from trade in a way that offsets the negative effects of trade on inequality. Moreover, we argue that this mechanism may be distorted by corruption and bad institutions in general. Quite to the contrary to common wisdom, we find that trade reduces inequality in countries with high institutional standards by means of a low level of corruption but increases inequality in countries with low levels of institutional quality.
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