Corruption and industrial dualism in less developed countries. Journal of International Trade and Economic Development 11, 63–76.competition and corruption are negatively related. In addition, evidence is also found that higher education and more politica

This paper provides an explanation for the observation that developing countries tend to have a higher degree of dualism in the size distribution of rms and a relatively smaller proportion of large rms than do developed countries. This paper builds a model where large ‘formal ’ rms attract rent seeking activities from the government while small rms do not. In the model, there exists a ‘competitive fringe ’ of small rms and a formal market consisting of Cournot competitors. The number of formal rms is made endogenous and is a function of the degree to which the government can extract rents. This ability to extract rents is itself posited as a function of the degree of corruption in a country’s government. Thus, it is the high degree of corruption in developing country governments that contributes to the dual nature of their industrial structure. The model predicts that the higher the degree of corruption, the fewer (and larger) are the formal rms, the lower is social welfare and the greater is dead-weight loss, and the higher are government rents. An examination of the size distribution of 16 countries and their degree of corruption shows that the degree of corruption is a good predictor of the percentage of large rms in an economy