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Nonlinear effect of corruption, uncertainty, and growth

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  • Ratbek, Ratbek

Abstract

Corruption in the public sector is manifested both in collusive and noncollusive forms. Collusive corruption erodes tax compliance and leads to higher tax evasion. Noncollusive corruption stems from abuse of the public position by corrupt public officials to extort bribes from the private agents, thus, reduces their income. Importantly, in both types of interaction with the public sector the private agents are bound to face uncertainty with respect to their disposable incomes, as neither bribes paid nor gains from tax evasion are deterministic. To analyze effects of corruption by accounting for the uncertainty caused by it, a stochastic dynamic growth model is considered. The model also incorporates possibility of nonlinear impact of corruption on production, which implies that corruption deteriorates the growth potential by preventing producers to enter high productive sectors. Most importantly, it is demonstrated that the rise of corruption, by increasing uncertainty, exerts adverse effects on capital accumulation, thus leads to lower growth rates. Hence, this paper resolves the theoretical ambiguity with regards to the overall growth effect of corruption obtained in previous studies.

Suggested Citation

  • Ratbek, Ratbek, 2010. "Nonlinear effect of corruption, uncertainty, and growth," MPRA Paper 24834, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24834
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    File URL: https://mpra.ub.uni-muenchen.de/24834/1/MPRA_paper_24834.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jain, Pankaj K. & Kuvvet, Emre & Pagano, Michael S., 2017. "Corruption’s impact on foreign portfolio investment," International Business Review, Elsevier, vol. 26(1), pages 23-35.

    More about this item

    Keywords

    Corruption; uncertainty; growth;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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