Contagious Corruption, Informal Employment, and Income: Evidence from Brazilian Municipalities

Abstract

Using data on 434 Brazilian municipalities, this paper estimates the effect of both corruption and the size of the informal sector on economic outcomes, while allowing for the possibility of spatial dependence. Overall, this paper finds that the size of the informal sector has a statistically significant and negative impact on economic outcomes that is much larger in magnitude than what is predicted by least-squares estimates due to its exclusion of spillover effects, while the effect of corruption is insignificant. Specifically, a one standard deviation increase in the size of the informal sector is associated with a 26 percent cumulative decrease in GDP per-capita, compared to the maximum of a 17 percent decline predicted by least-squares.

Keywords: Corruption, informal economy, income levels, growth, spatial dependence, spillovers

JEL Classification: D73, O17, O43