In a two-sector model, we show that corruption is endogenously determined by the model parameters. It depends on the fraction of unskilled labor and the relative TFP differential between skilled and unskilled sector. First, for a larger proportion of unskilled labor force, there is widespread corruption and for smaller share of unskilled labor force, there is no corruption. For the intermediate level, equilibrium depends on the number of corrupt bureaucrats and there are multiple equilibria. Second, corruption decreases with the relative TFP differential between skilled and unskilled sector. For the intermediate level of TFP differential, there are multiple equilibria. On its consequences, corruption causes rise in the wage inequality between skilled and unskilled workers. It distorts the allocation of resources, which results in the output and the welfare losses, and it is associated with the higher tax rate.
Control rights Bureaucratic corruption Resource allocation TFP differential Wage inequality
D73 H32 I31 J31
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I am grateful to Tanguy van Ypersele, Cecilia García-Peñalosa, Patrick Pintus and to seminar participants at GREQAM for their useful comments and suggestions. I would especially like to thank anonymous referee for his helpful suggestions.
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