We consider a neoclassical growth model with endogenous corruption. Corruption and wealth, which are co-determined in equilibrium, are shown to be negatively correlated. Richer countries tend to be less corrupt, and corrupt economies tend to be poorer. This observation gives rise to the following puzzle: if poorer countries do indeed experience higher levels of corruption, and if indeed as suggested by a number of empirical studies corruption hampers growth, then how did rich countries, who were poor once, become rich? Our answer is simple. In the past, economies were mostly ‘closed’ in the sense that it was difficult to transfer illicit money outside of the economy. In contrast, today’s economies are mostly open. In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy’s productive capital. In contrast, in today’s open economies, corrupt agents smuggle stolen money abroad depleting their country’s stock of capital. We confirm this intuitive explanation by testing the hypothesis that the effect of corruption on wealth depends on the economy’s degree of openness using cross-country data.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4057.
Zvika Neeman & M. Daniele Paserman & Avi Simhon, 2004.
"Corruption and Openness,"
Discussion Paper Series
dp353, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem.
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Find related papers by JEL classification: F20 - International Economics - - International Factor Movements and International Business - - - General H00 - Public Economics - - General - - - General O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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