Corruption and Government Regulations: An empirical Analysis

The current cross-country empirical literature on the determinants of corruption has demonstrated a direct relationship between government regulations and corruption by assuming a linear relationship between them. This study reexamines the relationship for a sample of 43 countries by testing the presence of threshold effects of government regulations on the level of corruption after controlling the effects of bureaucratic competition, level of education, GDP growth, and urbanization. Using two measures of corruption from the World Bank survey, the study finds the evidence of threshold; the direct relationship between corruption and government regulations is profound in countries where the index of government regulations is less than the threshold level. Consequently, it suggests that government regulations spawn corruption before the threshold level is reached. Moreover, this study also provides evidence of the existence of an inverted U-shape relationship between government regulations and corruption. The study finds that regulations reduce corruption if the index of regulation is above the threshold level negating the neo-classical liberalism. The study concludes that government regulations can also be used to reduce corruption. Thus, prudent policies with or without government interventions are likely to be less corrupt and, therefore, are more conducive to economic growth