Abstract

A number of recent studies for Latin America show that as the size of the informal economy
grows, corruption is less harmful to inequality. We investigate if this relationship is equally
compelling for developing countries in Asia where corruption, inequality and shadow
economies are considerably large. We use Panel Least Square and Fixed Effects Models for
Asia to find that both ‘Corruption Perception Index’ and ‘ICRG’ index are sensitive to a
number of important macroeconomic variables. We find that in the absence of the shadow
economy, corruption increases inequality. However, with larger shadow economies in South
Asia, the income inequality tends to fall.