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Corruption and the Composition of Public Expenditures: Evidence from OECD Countries

  • Hessami, Zohal

This paper analyzes how corruption affects the composition of public expenditures. First, a two-stage rent-seeking model with endogenous rent-setting is derived that captures both "political corruption" and "bureaucratic corruption". The model illustrates how asymmetries between industries in the degree of competition and in the difficulty of concealing bribery may influence the allocation of public spending. The theoretical implications are tested with a panel dataset for 26 OECD countries over the 1996 - 2008 period. The results suggest that the shares of spending on health and environmental protection increase, while the shares of spending on social protection and recreation, culture and religion decline with higher levels of corruption. The significance of these distortions is robust to a variety of specifications such as fixed effects, random effects, seemingly unrelated regressions, the inclusion of additional controls, and the use of alternative corruption indicators.

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File URL: http://mpra.ub.uni-muenchen.de/25945/1/MPRA_paper_25945.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25945.

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Date of creation: 26 Sep 2010
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Handle: RePEc:pra:mprapa:25945
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  1. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Bureaucratic corruption and the rate of temptation: do wages in the civil service affect corruption, and by how much?," Journal of Development Economics, Elsevier, vol. 65(2), pages 307-331, August.
  2. Mo, Pak Hung, 2001. "Corruption and Economic Growth," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 66-79, March.
  3. Neal D. Woods, 2008. "The Policy Consequences of Political Corruption: Evidence from State Environmental Programs," Social Science Quarterly, Southwestern Social Science Association, vol. 89(1), pages 258-271.
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  5. Bjorn Frank & Guenther G. Schulze, 2000. "Deterrence versus Intrinsic Motivation: Experimental Evidence on the Determinants of Corruptibility," Econometric Society World Congress 2000 Contributed Papers 0950, Econometric Society.
  6. Silvana Robone & Alberto Zanardi, 2006. "Market structure and technology: evidence from the Italian National Health Service," International Journal of Health Care Finance and Economics, Springer, vol. 6(3), pages 215-236, September.
  7. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  8. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," Public Choice, Springer, vol. 122(1), pages 69-97, January.
  9. Fredriksson, Per G. & Svensson, Jakob, 2003. "Political instability, corruption and policy formation: the case of environmental policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1383-1405, August.
  10. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
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  12. Lambsdorff, Johann Graf, 2002. " Corruption and Rent-Seeking," Public Choice, Springer, vol. 113(1-2), pages 97-125, October.
  13. Jong-A-Pin, Richard, 2009. "On the measurement of political instability and its impact on economic growth," European Journal of Political Economy, Elsevier, vol. 25(1), pages 15-29, March.
  14. Hillman, Arye L. & Katz, Eliakim, 1987. "Hierarchical structure and the social costs of bribes and transfers," Journal of Public Economics, Elsevier, vol. 34(2), pages 129-142, November.
  15. Appelbaum, Elie & Katz, Eliakim, 1987. "Seeking Rents by Setting Rents: The Political Economy of Rent Seeking," Economic Journal, Royal Economic Society, vol. 97(387), pages 685-99, September.
  16. Roberto Ricciuti, 2004. "Political Fragmentation and Fiscal Outcomes," Public Choice, Springer, vol. 118(3_4), pages 365-388, 03.
  17. Clara Delavallade, 2006. "Corruption and distribution of public spending in developing countries," Journal of Economics and Finance, Springer, vol. 30(2), pages 222-239, June.
  18. Katz, Eliakim & Tokatlidu, Julia, 1996. "Group competition for rents," European Journal of Political Economy, Elsevier, vol. 12(4), pages 599-607, December.
  19. Rose-Ackerman, Susan, 1975. "The economics of corruption," Journal of Public Economics, Elsevier, vol. 4(2), pages 187-203, February.
  20. Hillman, Arye L., 2004. "Corruption and public finance: an IMF perspective," European Journal of Political Economy, Elsevier, vol. 20(4), pages 1067-1077, November.
  21. Lorenzo Pellegrini & Reyer Gerlagh, 2004. "Corruption's Effect on Growth and its Transmission Channels," Kyklos, Wiley Blackwell, vol. 57(3), pages 429-456, 08.
  22. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  23. Gupta, Sanjeev & de Mello, Luiz & Sharan, Raju, 2001. "Corruption and military spending," European Journal of Political Economy, Elsevier, vol. 17(4), pages 749-777, November.
  24. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  25. Stein, William E, 2002. " Asymmetric Rent-Seeking with More Than Two Contestants," Public Choice, Springer, vol. 113(3-4), pages 325-36, December.
  26. repec:cup:cbooks:9780521494267 is not listed on IDEAS
  27. Nitzan, Shmuel, 1991. "Collective Rent Dissipation," Economic Journal, Royal Economic Society, vol. 101(409), pages 1522-34, November.
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  29. van Dalen, Hendrik P & Swank, Otto H, 1996. " Government Spending Cycles: Ideological or Opportunistic?," Public Choice, Springer, vol. 89(1-2), pages 183-200, October.
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