The Effect of Income Inequality on Corruption within EU Regions

Abstract

This thesis examines the nexus between income inequality and corruption across European NUTS-2 regions, addressing the limitations of national-level aggregates that often mask regional heterogeneity. Utilising data from the European Quality of Government Index (2017–2024), it is investigated how local income disparities, measured by the S80/S20 ratio, shape institutional quality. To overcome the endogeneity inherent in the inequality-corruption cycle, an instrumental variable strategy is employed using an innovation-driven Bartik shifter. By interacting 1995 regional employment shares with exogenous US R&D intensity shocks, wage polarisation driven by skill-biased technological change is isolated. While baseline estimates align with the ‘elite capture’ hypothesis, IV results reveal a paradoxical divergent effect, where innovation-driven inequality significantly mitigates both the perception and experience of corruption. Specifically, a one-unit increase in the innovation-driven S80/S20 ratio leads to a 1.93-unit decrease in experienced corruption. These findings suggest that innovative sectors disrupt traditional rent-seeking networks and meritocratises local power structures.