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Growth, public investment and corruption with failing institutions

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Author Info
David, DE LA CROIX () (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
Clara, DELAVALLADE

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Abstract

Corruption is thought to prevent poor countries from catching-up. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distortion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individualsÕ choice between productive activity and rent-seeking. At equilibrium, the intensity of corruption and the structure of public investment are determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption yet still the possibility of corruption distorts the allocation of public investment, thus hampering growth. We test the implications of the model on a panel of countries estimating a system of equations which instrumental variables. We find that countries with a high predatory technology invest more in housing and physical capital in comparison with health and education. For equal initial conditions, such countries grow slower and have higher corruption, in particular when political power is concentrated

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006057.

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Length: 45
Date of creation: 26 Oct 2006
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Handle: RePEc:ctl:louvec:2006057

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Related research
Keywords: Public investment; Optimal growth; Corruption; Political power;

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Find related papers by JEL classification:
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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Cited by:
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  1. Aldave, Iván & García-Peñalosa, Cecilia, 2009. "Education, Corruption and the Natural Resource Curse," Working Papers 2009-005, Banco Central de Reserva del Perú. [Downloadable!]
    Other versions:
  2. Cuong Le Van & Mathilde Maurel, 2006. "Education, corruption and growth in developing countries," Cahiers de la Maison des Sciences Economiques v06080, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
    Other versions:
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