Determinants of income inequality in post-communist Central and Eastern European countries: Role of corruption

The main purpose of this thesis is to investigate the effect of corruption on income inequality (that could serve as indicator of the welfare of whole society). Since post-communist countries of Central and Eastern Europe had issues with providing effective policies for adapting to the market economy, we want to discover main drivers of this situation. We examined previous researches that suggest both positive and negative correlation between corruption level and income inequality. Main obstacle of the research is inherent heterogeneity present across countries. Our analysis was performed on two datasets: 11 post- communist countries CEE and additional 17 European Union countries. We implemented different estimation methods and discovered that panel Vector autoregressive model is the best choice. Within the panel structure we tackled individual heterogeneity by estimating fixed effects and clustering on the country level, implemented dynamic relationship in the dependent variable and solved endogeneity problem by using instrumental variable. We found that corruption has positive relationship with income inequality. Furthermore, other important drivers are: social spending, education level and unemployment. As a result, we suggested the ways to decrease corruption on the appropriate example of..