Endogenous Corruption in Economic Development

Abstract

This paper presents an analysis of the joint determination of bureaucratic corruption and economic development. The analysis is based on a simple neo-classical growth model in which bureaucrats are employed as agents of the government to collect taxes from households. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with households to provide false information to the government. Costly concealment of this activity leads to a loss of resources available for productive investments. The incentive for an individual bureaucrat to accept a bribe depends on the number of other bureaucrats who are expected to accept bribes. This strategic interaction in bureaucratic decision making produces multiple (frequency-dependent) equilibria associated with different incidences of corruption. The predictions of the model accord strongly with recent empirical evidence. * The authors are grateful for the financial support of the ESRC (grant no. L138251030). The usual disclaimer applies.

Financial liberalization, bureaucratic corruption and economic development

“…More recently, Blackburn et al (2006) reveal how corruption and development may interact with each other to produce threshold effects and multiple (history-dependent) long-run equilibria, including a poverty trap equilibrium. Similar results are established in Blackburn et al (2010), Blackburn and Forgues-Puccio (2007) and Blackburn and Sarmah (2008) in connection with various other issues (contagion effects, income distribution and demographic transition). None of these investigations, which are all based on closed economy models, address the types of issue that may arise when considering corruption in an open economy context.…”

Corruption in Asia: Pervasiveness and arbitrariness

“…While informative, the demand side literature paid less attention to the heterogeneity of firms in bribery and the interactions between government officials and firms. The supply side or "endogenous corruption" literature does focus on the firm's perspective (Barreto, 2000;Blackburn, Bose, & Haque, 2004;Milovanovic, 2002). However, even in this literature, relatively little is known about the relationship between the nature of corruption and its cost to firms (Herrera & Rodriguez, 2003).…”

Why Do Firms Bribe?

“…Murphy et al (1993, p. 409) argue that an increase in corrupt activities in a country makes corrupt behaviors more attractive; as the "strength in numbers" speaks, "the probability of any one … getting caught is much lower" when more people are stealing. When most government officials ask for bribes, it is less risky for another government official to do the same (Blackburn et al 2004;Rose-Ackerman 1975); moreover, where bribery is prevalent, the risk involved in non-compliance increases (Drabek and Payne 2001). This is well put by Mauro (1998): In a country where everybody steals the probability of your being caught for stealing too is low and, even if you are caught, the probability of severe punishment is also low; thus, you steal, too.…”