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Developing Rotten Institutions

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  • Morgan Kelly

    (University College of Dublin)

Abstract

This paper models corruption as optimal parasitism in organizations where teams of agents are weakly restrained by principals. Each agent takes on part of the role of principal, choosing how much to invest in policing to repress corruption in others and how rapaciously to act when unpoliced opportunities arise. This simple model incorporates most of the factors stressed in empirical analyses of corruption, and gives rise to a wide variety of equilibria. Allow income to co-evolve with corruption, we show how adding corruption to a textbook exogenous growth model leads to a Lucas paradox. When income and corruption affect each other sufficiently strongly, economies converge to two corner equilibria despite diminishing returns to capital: a rich, clean corner and a poor, corrupt one; a pattern that appears to characterize international data.

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File URL: http://www.ucd.ie/economics/research/papers/2005/WP05.13.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200513.

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Length: 22 pages
Date of creation: 08 Aug 2005
Date of revision:
Handle: RePEc:ucn:wpaper:200513

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