1. The comparative effects of corruption and the second fundamental law of capitalism on Inequality
Adnan MS Fakir
Azraf Uddin Ahmad K M Masnun Hosain
Mostafa Rafid Hossain
Ridhim Sadman Gani

2. Introduction
Inequality has seen massive increases- in both the developed & developing world
Piketty’s work has brought back the dynamic nature of capitalism back to the foreground in the discussion why inequality is so high
For developing countries, the inability to redistribute incomes is however seen as key

3. Existing Literature
Corruption is a deterrant to growth .( Mauro(1995), Aidt(2009), Lash(2004),
Corruption has quadratic relationship with inequality. - Li,Xi & Xou (2000).
High and low level of corruption lead to low inequality- intermediate level of it leads to high inequality. - Li,Xi & Xou (2000).
Corruption is endogenous. Endogeneity by IVs & 2SLS. Ethno-Linguistic Fractionalization (ELF), Colonial history and exposure to democracy are good IVs. -Mauro (1995).
r-g is one of the central driving forces behind inequality in the long run

4. r-g Hypothesis 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒=𝑟. 𝐾 𝑌 𝛽= 𝑠 𝑔
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒=𝑟. 𝑠 𝑔
However, many authors have questioned the theoretical assumptions of the model(constant savings as in Krusell& Smith(2015), the role of taxes Galbraith (2014) & empirical validity(Acemoglu& Robinson(2014))

5. Objectives
To build on and further the existing literature by examining non-linear effects of corruption on inequality using a panel of both developed and developing countries.
To contribute to the literature by testing the validity of the second fundamental law of capitalism and how it interacts with increasing levels of corruption, affecting inequality.
Provided it holds true, we aim to study the interaction of such a law with the institutional framework of a state. By examining this relationship, we can establish a comparative to see if distortions such as corruption drive inequality or whether the general features of capitalism make inequality inevitable.

6. Key Variables of Interest
Gini Co-efficient - Standard economic measure of income inequality, based on Lorenz Curve. A society that scores 0.0 on the Gini scale has perfect equality in income distribution.
Corruption Perception Index - A ranking of countries according to the extent to which corruption is believed to exist. It is on a scale of zero to 100, with zero indicating high levels of corruption and 100 indicating low levels.
r-g –Here the return to capital is defined as the real interest rate

7. Vast Majority of Macroeconomic Data collected from World Bank Datasets
GINI Coefficients Collected from the Standardized World Income Inequality Dataset
Corruptions Perceptions Index is sourced from Transparency International
Democracy Index is sourced from the Polity IV dataset which is compiled by the Center for Systemic Peace. It is an 11 point scale from 0-11 based on democratic freedoms and institutional make-up.
Fractionalization Data is collected from Quality of Governance Dataset.
Data

8. Descriptive Statistics

9. Descriptive Statistics

10. Descriptive Statistics

11. Methodology • 2SLS Panel is the primary estimation strategy.
Time Dummies, Country level clustering and xtscc were used to control for serial correlation
For Corruption we included its square term
For some r-g specifications we utilized an interaction term between CPI & r-g
Quantile Regressions were also utilized to observe the effects of our key variables at different levels of inequality

12. Instruments Regulatory Quality Government Fractionalization
Government Effectiveness

13. Key Findings
•Corruption is a significant determinant of Inequality. In reality the effect is non-linear upon examination.
•r-g is also is significant in most specifications
•However, the interaction term is not
•The effects of both r-g and corruption decrease at higher levels of inequality, with r-g being altogether insignificant

14. Variables
Linear CPI OLS
Fixed Effects
Linear CPI IV
Non-Linear CPI OLS
Non-Linear CPI IV
Corruption *
0.169***
0.465*
(0.0136)
(0.0589)
(0.0333)
(0.248)
Corruption2
*** *
( )
( )

15. Non-Linear CPI Fixed Effects Non-Linear CPI IV Fixed Effects
VARIABLES
Non-Linear CPI Fixed Effects
Non-Linear CPI IV Fixed Effects
Non-Linear CPI Fixed Effects with (r-g)*CPI
Non-Linear CPI IV Fixed Effects with (r-g)*CPI
CPI
0.145**
0.256*
0.156**
0.298**
(0.0544)
(0.139)
(0.0554)
CPI squared
***
*** *
( )
( )
( )
( )
r-g
0.0179
0.0260**
0.0494*
0.0623**
(0.0100)
(0.0114)
(0.0242)
(0.0258)
r-g_CPI
( )
( )

16. Quantile Findings

17. Limitations Lack of availability of Time series Education data
Gini is an synthetic and vague measure of Inequality

18. Conclusion
Combating Corruption can be a major step in reducing inequality
However, the scale of improvement necessary may be out of reach
Returns to Capital do have short term effects
More efficient taxes on Capital are needed
But largely institutional change is necessary

19. Appendix

21. Gov. Spending as share of GDP -0.0113 0.0237 -0.0464 -0.150* (0.0480)
VARIABLES
Linear CPI OLS
Fixed Effects
Linear CPI IV
Non-Linear CPI OLS
Non-Linear CPI IV
Corruption *
0.169***
0.465*
(0.0136)
(0.0589)
(0.0333)
(0.248)
Corruption2
*** *
( )
( )
Gross Savings
0.0497***
0.0586***
0.0377***
(0.0100)
(0.0202)
(0.0101)
(0.0260)
Economic Growth
(0.0193)
(0.0227)
(0.0195)
(0.0204)
GDP per Capita
1.44e-05
6.60e-05
2.45e-05
5.21e-05
(7.71e-05)
(6.97e-05)
(7.68e-05)
(6.98e-05)
Inflation
0.0182
(0.0242)
(0.0284)
(0.0249)
(0.0272)
Gov. Spending as share of GDP
0.0237
-0.150*
(0.0480)
(0.0699)
(0.0498)
(0.0842)
Trade Openness
( )
( )
( )
( )
Unemployment Rate
0.0348
(0.0359)
(0.0407)
(0.0368)
(0.0357)
Population Growth
0.180
0.161
0.187
-0.133
(0.215)
(0.238)
(0.205)
(0.213)
Fractionalization
2.625***
1.208
2.878***
1.818
(0.705)
(1.065)
(0.731)
(1.119)
Natural Resource Rents as % of GDP
***
-0.106***
*** **
(0.0173)
(0.0221)
(0.0166)
(0.0277)
Democracy
0.167
0.354
0.146
0.254
(0.170)
(0.166)
(0.203)
Tax Revenue as % of GDP **
(0.0278)
(0.0282)
(0.0306)
(0.0348)
Years Since Independence
0.187***
0.0840
0.172***
-0.561
(0.0151)
(0.341)
(0.381)
Stock Market Capitalization
( )
( )
( )
( )
Observations
634
591
544
R-squared
0.045
0.049
Number of country 71 67
rk Wald F-Stat
31.349
7.158
Stock-Yogo 10% Maximal IV size
(19.93)
(7.03)

22. Non-Linear CPI Fixed Effects Non-Linear CPI IV Fixed Effects
VARIABLES
Non-Linear CPI Fixed Effects
Non-Linear CPI IV Fixed Effects
Non-Linear CPI Fixed Effects with (r-g)*CPI
Non-Linear CPI IV Fixed Effects with (r-g)*CPI
CPI
0.145**
0.256*
0.156**
0.298**
(0.0544)
(0.139)
(0.0554)
CPI squared
***
*** *
( )
( )
( )
( )
r-g
0.0179
0.0260**
0.0494*
0.0623**
(0.0100)
(0.0114)
(0.0242)
(0.0258)
r-g_CPI
( )
( )
Gross Savings
0.0196*
0.0205
0.0229**
0.0235
( )
(0.0217)
( )
(0.0216)
GDP per capita
*** **
*** **
(7.33e-05)
(9.97e-05)
(6.77e-05)
( )
Inflation
0.0245
0.0303*
(0.0278)
(0.0181)
(0.0253)
(0.0178)
Gov. Spending as % of GDP
-0.111
-0.203***
-0.112
-0.209***
(0.0910)
(0.0731)
(0.0914)
(0.0729)
Trade Openness
( )
(0.0112)
( )
(0.0116)
Unemployment Rate
0.0339
0.0743
0.0375
0.0808
(0.0422)
(0.0495)
(0.0411)
(0.0510)
Population Growth
0.613**
0.227
0.646**
0.284
(0.236)
(0.280)
(0.247)
(0.285)
Fractionalization
1.272
0.870
1.350
1.001
(0.814)
(1.001)
(0.851)
(1.013)
Natural Resource Rent as % of GDP
*** **
*** **
(0.0157)
(0.0252)
(0.0156)
(0.0259)
Tax Revenue
(0.0165)
(0.0174)
(0.0164)
Years Since Independence
0.252***
-0.661
-0.632
(0.0305)
(0.526)
(0.0309)
(0.536)
Observations
569
477
R-squared
0.112
0.104
Number of country 78 69
rk Wald F-Stat
30.494
21.142
Stock-Yogo 10% Maximal IV size
(7.03)
(not available)

23. Gov. Spending as share of GDP -0.119 -0.177 -0.145 -0.156 -0.139
VARIABLES
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Corruption
-0.168**
-0.114
-0.134*** * * * **
0.0208
(0.0733)
(0.0758)
(0.0649)
(0.0416)
(0.0379)
(0.0361)
(0.0315)
(0.0350)
(0.0784)
r-g
0.174
0.234***
0.245***
0.214***
0.175***
0.157***
0.128***
0.0646
0.0221
(0.194)
(0.0828)
(0.0450)
(0.0470)
(0.0418)
(0.0419)
(0.0318)
(0.0417)
(0.0402)
Gross Savings
0.0379
0.0160
0.0660
0.0607
0.0567
-0.148
(0.105)
(0.0832)
(0.0746)
(0.0747)
(0.0715)
(0.0910)
(0.0982)
(0.101)
(0.0954)
Economic Growth
0.187
0.204
0.223*
0.239**
0.275**
0.283**
0.313***
0.146
0.180*
(0.179)
(0.126)
(0.119)
(0.125)
(0.118)
(0.111)
(0.131)
(0.107)
GDP per Capita
***
***
***
***
***
***
***
( )
( )
( )
(6.37e-05)
(5.55e-05)
(5.01e-05)
(4.66e-05)
(4.56e-05)
( )
Inflation
-0.128
0.0534
0.0722
(0.189)
(0.142)
(0.116)
(0.0997)
(0.106)
(0.124)
(0.0981)
Gov. Spending as share of GDP
-0.119
-0.177
-0.145
-0.156
-0.139
-0.241
-0.468**
-0.544***
(0.148)
(0.133)
(0.103)
(0.128)
(0.139)
(0.166)
(0.188)
(0.173)
(0.321)
Trade Openness ** **
***
***
***
***
***
***
***
(0.0195)
(0.0189)
(0.0168)
(0.0125)
(0.0116)
(0.0117)
( )
( )
(0.0147)
Unemployment Rate
0.102
0.212
0.104
0.111
0.205
0.386**
0.554***
0.578***
0.489***
(0.239)
(0.146)
(0.144)
(0.104)
(0.190)
(0.174)
(0.156)
Population Growth
2.732***
2.747***
2.422***
2.029**
1.454**
1.724***
2.010***
2.486***
3.100***
(0.617)
(0.583)
(0.687)
(0.789)
(0.577)
(0.586)
(0.524)
(0.591)
(0.590)
Fractionalization
-0.926
3.007
3.588
4.468
5.728*
5.396*
5.094
-0.432
-7.366
(4.724)
(3.381)
(3.205)
(4.018)
(3.144)
(2.859)
(3.765)
(5.207)
(7.745)
Natural Resource % of GDP
0.132**
0.145***
0.139***
0.125**
0.116**
0.163***
0.185***
0.161***
0.0396
(0.0590)
(0.0473)
(0.0489)
(0.0584)
(0.0490)
(0.0589)
(0.0556)
(0.0582)
(0.0654)
Democracy
1.007***
0.930***
1.059***
0.810**
0.555***
0.771***
0.657**
0.514*
(0.240)
(0.241)
(0.285)
(0.354)
(0.208)
(0.260)
(0.272)
(0.304)
(0.494)
Tax Revenue as % of GDP
0.0652
0.0582
0.0802
0.204***
0.160***
0.0925*
0.0679*
0.0502
0.0793**
(0.0823)
(0.0807)
(0.0801)
(0.0561)
(0.0461)
(0.0474)
(0.0370)
(0.0322)
(0.0400)
Years Since Independence *
***
***
***
***
***
( )
( )
( )
( )
( )
( )
( )
( )
Stock Market Capitalization
0.0489***
0.0454***
0.0543***
0.0699***
0.0677***
0.0565***
0.0441***
0.0362***
0.0112
(0.0106)
(0.0104)
( )
(0.0118)
(0.0110)
(0.0111)
(0.0115)
(0.0105)
Constant
30.74***
29.69***
28.93***
33.91***
33.26***
34.83***
39.77***
50.05***
50.70***
(7.117)
(4.752)
(4.704)
(4.359)
(4.314)
(4.534)
(5.437)
(6.355)
(7.344)
Observations
421

24. Non-Linear CPI Fixed Effects with (r-g)*CPI
VARIABLES
Linear CPI IV FE
Non-Linear CPI IV FE
Non-Linear CPI Fixed Effects with (r-g)*CPI
CPI
-0.625*
-0.613*
-0.659*
(0.0572)
(0.367)
(0.338)
(0.373)
CPI squared * * *
( )
( )
( )
r-g
0.0177
(0.0200)
(0.111)
r-g_CPI
( )
Gross Savings Rate
0.0247
0.0265
0.0225
(0.0398)
(0.0519)
(0.0589)
(0.0587)
GDP per Capita
-3.72e-05
-4.43e-06
7.11e-05
8.84e-05
( )
( )
( )
( )
Inflation
0.0329
0.121**
0.109*
0.104
(0.0558)
(0.0516)
(0.0610)
(0.0670)
Gov. Spending as share of GDP
0.101
0.271*
0.201
0.200
(0.0921)
(0.140)
(0.127)
(0.128)
Trade Openness
0.0137
0.0189
0.0168
(0.0105)
(0.0141)
(0.0193)
(0.0217)
Unemployment Rate
0.0366
0.0346
(0.0413)
(0.0493)
(0.0788)
(0.0787)
Population Growth
-0.329
-0.306
-0.356
(0.352)
(0.361)
(0.505)
(0.519)
Fractionalization
-3.544*
-4.387
-5.756*
-6.082*
(1.934)
(2.711)
(3.076)
(3.452)
Natural Resource Rents as % of GDP
0.0925
0.186*
0.214**
0.210**
(0.0833)
(0.0966)
(0.0985)
(0.0997)
Democracy
0.0197**
0.0329**
0.0528
0.0704
( )
(0.329)
(0.336)
Tax Revenue
0.0242
0.0928
0.102
(0.0293)
(0.0524)
(0.0972)
(0.107)
Years Since Independence
1.038**
1.766***
1.846**
1.842**
(0.451)
(0.659)
(0.853)
(0.859)
Stock Market Capitalization
9.97e-06
( )
( )
( )
( )
Observations
326
304
209
R-squared
0.100
-0.044
0.057
0.037
Number of countries 56 43
Wald F-Stat
32.474
8.531
11.775
8.447
Stock-Yogo 10% Maximal IV size
(19.93)
(7.03)
(not known)

25. IneratciontermmodelCpi
VARIABLES
LinearIV
NonLinearCPIIV
NonLinearCPI_sqrIV
NonLinearrgCPI
NonlinearrgCpi_sqr
IneratciontermmodelCpi
Interactioncpi_sqr
Interctionr-g_cpi
govfrac
-0.456
(1.930)
Regulatoryquality L1
7.99***
(1.48)
602***
(139)
7.53***
(1.35)
486***
(130)
7.29***
(7.36)
454***
4.703
(30.46)
goveffctiveness
8.914***
(2.584)
goveffctiveness_sqr
2.79***
(0.535)
312***
(67.1)
2.72***
(0.670)
416***
(92.5)
2.84***
(0.678)
431***
(93.7)
-26.5
(17.4)
Inter3
0.0425
(0.0244)
5.60
(2.70)
17.8***
(1.49) rg
(0.0277)
-2.87
(3.26)
(0.0285)
-3.83
(3.37)
34.7***
(1.58
gsavings
0.0914
(0.0607)
0.066
(0.0504)
-0.521
(4.33)
0.0583
(0.0470)
3.49
(4.49)
0.0470
(0.0478)
2.00
(4.53)
-0.604
(1.06)
ecogrth
-4.41
(0.0632)
(4.69)
GDPcapita
0.0564
0.0605
0.0632 **
( )
( )
(0.0196)
( )
(0.0222)
( )
(0.0220)
( )
inflation
-5.09
-5.78
-7.23
1.50
(0.0840)
(0.0772)
(8.39)
(0.0509)
(5.35)
(0.0521)
(5.48)
(2.07)
govspedgdp
0.339
0.350**
17.06
0.427**
29.7
0.433***
30.41**
0.747
(0.214)
(0.161)
(14.67)
(0.124)
(12.4)
(12.32
(2.56)
trdopn
0.0542**
0.0545**
4.42
0.051**
2.79
0.0550***
3.27
0.168
(0.0261)
(0.0187)
(2.14)
(0.017)
(1.73)
(0.0172)
(1.72)
(0.354)
unemploymentrate
-0.168
0.258
0.149**
10.67
0.125
7.52
-1.60
(0.135)
(0.0851)
(8.02)
(0.0735)
(6.96)
(0.0732)
(6.93)
(2.79)
PopulationGrowth
-0.735*
0.264
30.07
0.681
155**
0.648
151
4.02
(0.397)
(74.08)
(0.554)
(66.7)
(21.0)
frac
-4.726
-5.53
-477
-1.99
-73.1
-2.21
-90.1
29.8
(4.010)
(2.39)
(209)
(1.70)
(137)
(37.1)
natrlrpergdp
-0.196**
-3.53
-0.395
-0.146
-0.625
(0.0933)
(0.0616)
(5.38)
(0.0625)
(5.25)
(0.0649)
(5.63)
(1.42)
democ
0.233
12.09
(0.0306)
(0.165)
(15.3)
taxrev
0.0179
-12.07
0.272***
29.3***
-0.791
(0.183)
(0.0937)
(9.67)
(0.0802)
(9.16)
(0.0803)
(9.18)
(0.826)
yearindp
0.152
2.16
112
4.23***
342***
4.16***
333***
27.7
(0.114)
(0.904)
(103)
(0.926)
(98.6)
(0.962)
(98.4)
(17.1)
stmktcap
-0.196
( )
(0.861)
Constant
14.76
(17.97)
Observations
676
R-squared
0.213
Number of country 78

26. Non-Linear w/ interaction cpi -0.102 0.465* 0.256* 0.298** (0.0621)
VARIABLES
Linear Model
Non-Linear
Non-Linear w/ r-g
Non-Linear w/ interaction
cpi
-0.102
0.465*
0.256*
0.298**
(0.0621)
(0.248)
(0.139)
cpi_sqr * *
( )
( )
( ) rg
0.0260**
0.0623**
(0.0114)
(0.0258)
rg_cpi
( )
(0.0228)
(0.0204)
GDPcapita
6.82e-05
5.21e-05 ** **
(7.06e-05)
(6.98e-05)
(9.97e-05)
( )
inflation
0.0182
0.0245
0.0303*
(0.0286)
(0.0272)
(0.0181)
(0.0178)
govspedgdp
0.0255
-0.150*
-0.203***
-0.209***
(0.0705)
(0.0842)
(0.0731)
(0.0729)
trdopn
( )
( )
(0.0112)
(0.0116)
unemploymentrate
0.0348
0.0743
0.0808
(0.0409)
(0.0357)
(0.0495)
(0.0510)
PopulationGrowth
0.161
-0.133
0.227
0.284
(0.239)
(0.213)
(0.280)
(0.285)
frac
1.169
1.818
0.870
1.001
(1.077)
(1.119)
(1.001)
(1.013)
natrlrpergdp
-0.107*** ** ** **
(0.0223)
(0.0277)
(0.0252)
(0.0259)
democ
0.356*
0.254
(0.216)
(0.203)
taxrev **
(0.0285)
(0.0348)
(0.0174)
yearindp
0.0930
-0.561
-0.661
-0.632
(0.344)
(0.381)
(0.526)
(0.536)
stmktcap
( )
( )
Observations
591
544
477
R-squared
0.040
0.049
0.112
0.104
Number of country 67 69
Stock & Yogo Critical Value
31.349
7.158
30.494
21.142

27. VARIABLES
Wih Education
cpi
0.391***
(0.124)
cpi_sqr
***
( ) rg
0.0239
(0.0281)
gsavings
0.0836
(0.0979)
GDPcapita **
( )
inflation
(0.0527)
govspedgdp
-0.245
(0.167)
trdopn
(0.0241)
unemploymentrate
-0.117
(0.0970)
PopulationGrowth
1.331*
(0.700)
frac
3.330*
(1.796)
natrlrpergdp
-0.137**
(0.0553)
lsc
(0.0410)
taxrev
(0.0600)
yearindp
-0.210*
(0.122)
Constant
47.75***
(10.91)
Observations
162
Number of country 74
R-squared
0.316