Income Inequality, Fiscal Redistribution, and Governmental Corruption: Evidence from Chinese Provincial Data

We build a theoretical model that describes the relationship between income inequality, fiscal redistribution and corruption in China. With between-group econometric model, using the provincial panel data of China from 1997 to 2006, this paper finds strong evidence in support of the propositions revealed by the theoretical model. The conclusion of empirical analysis is that fiscal redistribution as a remedy of the failure of market allocation fails to restrain income inequality. In contrast, it worsens income inequality because of the corruption when the officials implement fiscal redistribution policies. The article suggests that we should eliminate the corruption in the process of fiscal redistribution to effectively restrain income inequality and promote social harmony.