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Governance and Corruption - sand or grease in the wheels?

Author

Listed:
  • Kouramoudou Keita
  • Hannu Laurila

    (School of Management, University of Tampere)

Abstract

Conventional wisdom is that corruption is a major obstacle of economic development. Yet, there is an unresolved debate in the economic literature whether corruption is detrimental (Sand the Wheels Hypothesis - SWH) or beneficial (Grease the Wheels Hypothesis - GWH). While SWH is the mainstream idea, the proponents of GWH argue that corruption may be beneficial if governance is badly malfunctioning. Méon & Sekkat (2005) opposes this view by stating that corruption not only hampers growth and investments but even more so if governance is bad, which is what SWH strictly says. This paper challenges the finding by imitating the study with broader data. The results corroborate GWH and comport with Méon & Weill (2008), which finds that corruption enhances aggregate efficiency. The conclusion is that, in the second-best world of many developing countries, corruption may in effect mitigate the deeply rooted distortions caused by flaws in rule of law and government efficiency. Therefore, efforts should be put rather on reinforcing the legislative and administrative systems than on the plain fight against curruption.

Suggested Citation

  • Kouramoudou Keita & Hannu Laurila, 2016. "Governance and Corruption - sand or grease in the wheels?," Working Papers 1698, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:1698
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    File URL: http://urn.fi/URN:ISBN:978-952-03-0057-9
    File Function: First version, 2016
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    More about this item

    Keywords

    corruption; governance; growth; investments;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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