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Growth, public investment and corruption with failing institutions

Author

Listed:
  • David de la Croix

    () (CORE - Department of Economics - UCL - Université Catholique de Louvain)

  • Clara Delavallade

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Corruption is thought to prevent poor countries from catching up with richer ones. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distorsion, we propose a dynamic model where households vote for the composition of public spending, subject to an incentive constraint reflecting individuals' choice between productive activity and rent-seeking. In equilibrium, the structure of public investment is determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption but the possibility of corruption still distorts the allocation of public investment. We test the implications of the model on a set of countries using a two-stage least squares estimation. We find that developing countries with high predatory technology invest more in housing and physical capital in comparison with health and education. The reverse is true for developed countries.

Suggested Citation

  • David de la Croix & Clara Delavallade, 2008. "Growth, public investment and corruption with failing institutions," Post-Print halshs-00129741, HAL.
    • Handle: RePEc:hal:journl:halshs-00129741
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00129741v2
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    References listed on IDEAS

    as
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    Keywords

    political power; Public investment; corruption; optimal growth;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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