Contagious corruption, informal employment, and income: evidence from Brazilian municipalities

Using data on 434 Brazilian municipalities, this paper explores the influence both corruption and the size of the informal sector have on economic outcomes, while allowing for the possibility of spatial dependence. Overall, this paper finds that the size of the informal sector has a statistically significant and negative association with economic outcomes that is much larger in magnitude than what is predicted by least squares estimates due to its exclusion of spillover effects, while corruption has no significant relationship. Specifically, a one standard deviation increase in the size of the informal sector is associated with a 26 % cumulative decrease in GDP per capita, compared to the maximum of a 17 % decline predicted by least squares.