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Abstract
This paper explores popular economic, political, and social conceptions of the relationshipbetween income inequality and corruption. Contemporary politics have become
heavily divided on income inequality. Therefore, using current econometric methods
such as panel Granger (non)-causality, dynamic panel models, and cross-lagged
maximum likelihood estimation to understand better the underlying data generating
process. The significance of this paper is threefold. First, multiple dynamic regressions
are used to test the econometric assumptions identifying possible bidirectional
causality. Second, the analysis finds that income inequality is not a statistically significant
determinant of contemporaneous corruption. However, preceding values of the
income share of the top 1% do correlate with future values of corruption in all dynamic
models. Last, to test these assumptions against the new institutional hypothesis proposed
by North (1990), a Panel Vector Autoregression tests whether specific political
environments favor economic growth. The Panel Vector Autoregression results show
that variations in per capita GDP can explain 8% of the variation, and 1% income
share explains 13% of the variation in corruption perceptions. Further, robustness
checks of the dynamic panel models include the use of two different periods. First, by
using data from 2000 and 2002 through 2017 and because of the slow movement to
change in corruption and inequality, I took the average over three-year periods from
2002 through 2017.