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Corruption in an Unstable Environment

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  • Merz, Christian
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    Abstract

    In this paper we study the influence of economic stability on the level of corruption in a country, where high stability is defined as a low level of variance in economic output growth. We present a political competition model with exogenous shocks to economic output where politicians can decide about the level of corruption and an election is held within the framework of a Bayesian game. Corruption is assumed to be harmful to the economy and politicians try to maximize income from corrupt activities as well as the probability of getting reelected. We show that independent of the absolute size of economic output growth a low degree of economic stability yields a high level of corruption and vice versa. Thus we conclude that not only does corruption influence economic activity, but also the opposite effect might exist, namely that exogenously caused fluctuations of output influence the readiness of politicians to behave in a corrupt manner. To support our theoretical findings we additionally carry out a cross-country empirical analysis of GDP growth variance and corruption and come to results confirming our thesis.

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    File URL: http://epub.ub.uni-muenchen.de/367/1/corr_pap_discuss_format.pdf
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    Bibliographic Info

    Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 367.

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    Date of creation: May 2004
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    Handle: RePEc:lmu:muenec:367

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    Keywords: Corruption; Political Competition; Bayesian Game; Cross Country Study on Corruption;

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    1. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
    2. Andvig, Jens Chr. & Moene, Karl Ove, 1990. "How corruption may corrupt," Journal of Economic Behavior & Organization, Elsevier, vol. 13(1), pages 63-76, January.
    3. Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S270-S293, December.
    4. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    5. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-35, December.
    6. Daron Acemoglu & James A. Robinson, 2000. "Why Did The West Extend The Franchise? Democracy, Inequality, And Growth In Historical Perspective," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1167-1199, November.
    7. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
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