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Growth and welfare effects of corruption penalties

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  • Afonso, Oscar
  • Bandeira, Ana Maria
  • Lima, Pedro G.

Abstract

This paper analyses the steady-state effect of business corruption penalties on economic growth, corruption and welfare. To that end, the baseline horizontal R&D growth model is extended to include corruption, which is generated in intermediate goods production. Taxation on corruption depresses profits in production but also wages, leading to labor being reallocated from production to R&D, and, therefore, to a higher economic growth rate. Moreover, it also reduces corruption and increases welfare if preferences towards a corruption-free environment are strong enough. The results are in line with the data observed for 15 EU countries.

Suggested Citation

  • Afonso, Oscar & Bandeira, Ana Maria & Lima, Pedro G., 2022. "Growth and welfare effects of corruption penalties," Economic Systems, Elsevier, vol. 46(3).
    • Handle: RePEc:eee:ecosys:v:46:y:2022:i:3:s0939362522000668
    DOI: 10.1016/j.ecosys.2022.101004
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    More about this item

    Keywords

    Horizontal growth model; Consumer’s welfare; Corruption;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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