Studying the Effect of Corruption on Income Per-capita Level in an IV Estimation in Developing countries

Abstract

Income per-capita is a measure of economic well-being. Through its effect on economic development, it can indirectly affect sustainable development. Hence, it is essential to study the determinants of Income per-capita Level. Recently, corruption level has played an influential role in determining income per-capita.  However, theoretically and empirically its effect is still debatable. Besides the traditional determinants of income per-capita, the effect of corruption on Income per-capita level is examined in a sample of developing countries between1996-2013. There is a potential endogeneity problem that arises from the two way relationship between corruption and income per capita levels which threatens internal validity. Accordingly, an instrumental variable (IV) in a two stage least squares (2SLS) estimation is conducted. The results indicate its presence. Furthermore, the results show that corruption is a significant determinant of income per-capita level in developing countries. Policy implications to promote governance which in turn affect sustainable development are also given.

 

Keywords: Income per-capita, corruption, IV estimation and developing countries.

JEL: H8, O1