We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but in closed economies there is no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to nclude only highly corrupt countries, if we restrict attention to specific geographic areas or to poor countries, and if we allow for the possible endogeneity of the corruption measure. We find that the extent to which corruption affects output is determined primarily by the degree of financial openness. The difference between closed and open economies is mainly due to the different effect of corruption on capital accumulation. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain.
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
164.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:164
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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: F2 - International Economics - - International Factor Movements and International Business H0 - Public Economics - - General O1 - Economic Development, Technological Change, and Growth - - Economic Development O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
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"Fractionalization,"
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Barro, Robert J & Sala-i-Martin, Xavier, 1992.
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