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The Political Economy of Corruption and the Role of Financial Institutions

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Author Info
Kira Boerner (Department of Economics, University of Munich, Gebelestr. 13, 81679 Munich, Tel: +49 89 980970, Fax: +49 89 2180 2767, kira@dr-boerner.de)
Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.: +49 89 2180 3232, Fax.: +49 89 2180 2767, christa.hainz@lrz.uni-muenchen.de.)

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Abstract

In many developing countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people generally suffers from high corruption levels. We explain why citizens do not exert enough political pressure to reduce corruption if financial institutions are missing. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. The mode of financing this entry fee determines the distribution of the rents from corruption. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 135.

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Date of creation: 2006
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Handle: RePEc:trf:wpaper:135

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Related research
Keywords: Corruption; Financial Markets; Institutions; Development; Voting;

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Find related papers by JEL classification:
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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