Does Corruption Affect the Informal-Formal Sector Income Gap? Evidence from Brazil
32 Pages Posted: 2 May 2016 Last revised: 25 Apr 2019
Date Written: April 23, 2019
This paper investigates the relationship between political corruption and the informal-formal sector income gap. We focus on a sample of 476 randomly selected municipalities in Brazil, and combine individual level Census data with measures of municipal corruption. We first document the upward pressure corruption puts on the informal-formal income gap. We then utilize a measure of mismanagement by governmental officials as an instrument for corruption to show that these results are robust to plausibly exogenous variation in corruption. When disaggregating the results, we show that the effect of corruption is heterogeneous across industries, with a significant impact on the construction industry in particular.
Keywords: corruption, informal economy, shadow economy, dual labor market theory
JEL Classification: D73, O17, E26, J46
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