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Institutions and the Relation between Corruption and Economic Growth

  • Wouter Ebben
  • Albert de Vaal
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    We study the effects of corruption on economic growth in a framework that includes corruption as part of the institutional setting of countries. Using a formal growth framework where corruption affects labor inputs and the provision of public goods, we find that particularly in situations where institutions are not well developed corruption may be conducive to growth. In these instances the positive effect of corruption on the working of the institutional system outweighs the negative direct effects of corruption on growth. We also find that the interaction among institutions themselves matters. This underscores the importance of taking into account the complete institutional setting when studying corruption, both in theory as well as in empirics.

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    File URL: http://degit.sam.sdu.dk/papers/degit_14/c014_014.pdf
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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c014_014.

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    Length: 34 pages JEL Classification:
    Date of creation: Jun 2009
    Date of revision:
    Handle: RePEc:deg:conpap:c014_014
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    1. Gradstein, Mark, 2004. "Governance and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 505-518, April.
    2. Toke Aidt & Jayasri Dutta & Vania Sena, 2006. "Governance Regimes, Corruption and Growth: Theory and Evidence," Discussion Papers 15_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    3. Jac C Heckelman & Benjamin Powell, 2010. "Corruption and the Institutional Environment for Growth," Comparative Economic Studies, Palgrave Macmillan, vol. 52(3), pages 351-378, September.
    4. Beck, Paul J. & Maher, Michael W., 1986. "A comparison of bribery and bidding in thin markets," Economics Letters, Elsevier, vol. 20(1), pages 1-5.
    5. Barreto, Raul A., 2000. "Endogenous corruption in a neoclassical growth model," European Economic Review, Elsevier, vol. 44(1), pages 35-60, January.
    6. Gradstein, Mark, 2002. "Governance and Growth," CEPR Discussion Papers 3270, C.E.P.R. Discussion Papers.
    7. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
    8. Johannes Fedderke, 2001. "Growth and institutions," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(6), pages 645-670.
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