Ruza, Nadiah (2018) Income Inequality, Corruption and Market Power: An Econometric Analysis. PhD thesis, Victoria University.

Abstract

Income inequality refers to how unevenly income is distributed in society. Income inequality has been perceived to escalate generally due to excessive gains by the top income earners. Rising income inequality across OECD countries and in the United States has become a center stage in policy debates across the world. The main objective of this study is to empirically explore the econometric linkages between income inequality, corruption and market power. This study seeks to shed light on possible causal links by utilizing international data on OECD countries and micro data for the United States at the state level to account for problems associated with data issues at the international level, such as unobservable institutional factors. This thesis uses data for 26 OECD countries (1984 to 2014) and 50 states of United States (1977 to 2014). Causality and copula analyses are undertaken to explore the empirical nexus of income inequality, corruption and market power. For causality testing, this study implements a procedure proposed by Dumitrescu and Hurlin (2012) for testing Granger causality in panel datasets. In a trivariate setting, this research extends Dumitrescu and Hurlin (2012) method and adapts Toda and Yamamoto (1995) approach in time series datasets. Causality analysis is employed to understand the causation between these three main issues. However, this analysis does not allow information on the total correlation of variables of interest (Chong and Gradstein, 2007). Thus, the copula approach is applied to complement causality analysis. Copula approach is a well-known tool in financial risk management and insurance applications and has proven to be a superior tool for modeling dependency structures. To our knowledge, it has rarely been used in economy applications. In this study, this study employed bivariate copula and Vine copula. The evidence presented here consistently shows that there is a strong linkage between income inequality, corruption and market power. However, the dependence between linkages is unique and varies between countries and states in the United States. The results demonstrate the strong dependence between these three factors. Most of the time, the linkage is slightly stronger for income inequality and corruption. These advances econometric method does provide a new insight in exploring the nexus of income inequality, corruption and market power. Further, Granger causality and dependence seems to be more pervasive in US states than OECD countries, possibly due to more accurate and consistent measurement of corruption and market power, and less unobservable heterogeneity in the former dataset. Overall, this research reveals some important results regarding the linkages of three variable of interest. The study also demonstrates that combining copula approach and causality testing can provide a comprehensive way to understand the linkages. This approach can lead to incremental insights and conclusions. The insights offered here are expected to be valuable for public policy on market distortions, income distribution and economic growth.

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