Endogenous Corruption in Europe: Destructive or Constructive? an Econometric Analysis of Corruption’s Effects on Output and Income Inequalities

Abstract: What are the origins and characteristics of corruption in European countries and how does it affect per capita GDP and income distribution? This research attempts to answer these questions using a panel of 28 European countries between 1995-2015 and a system of 3 simultaneous equations. Results imply that in the sample as a whole, corruption depresses economic output and increases income inequalities. We split the sample into groups according to their GDP level and we find that for poor countries corruption appears to have an efficiency enhancing mechanism, suggesting that corruption might be a stage in the development process through which all countries pass. Additionally, we explore the sub-sample of former communist countries to assess whether their corruption is distinctive.