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At what level of corruption does economic growth decrease?

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  • Trabelsi, Mohamed Ali
  • Trabelsi, Hédi

Abstract

With reference to the grease-the-wheels hypothesis, the impact of corruption on growth seems ambiguous. Therefore, the questions to be addressed are to what extent corruption can be tolerated and at what threshold it has a detrimental effect on an economy. In this article, we examine the impact of corruption on economic growth by testing the hypothesis that the relationship between these two variables is nonlinear and by assessing the veracity of the assumption that corruption is always detrimental to economic growth. In this article, a panel data analysis has been used to examine 88 countries over the 1984 to 2011 period. The findings indicate that beyond an optimal threshold, both high and low corruption levels can decrease economic growth. Under this optimal threshold, a moderate level of corruption, defined by the point of reversal of the curve of the marginal corruption effect on growth, could have advantages for economic growth.

Suggested Citation

  • Trabelsi, Mohamed Ali & Trabelsi, Hédi, 2014. "At what level of corruption does economic growth decrease?," MPRA Paper 81279, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:81279
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    File URL: https://mpra.ub.uni-muenchen.de/81279/1/MPRA_paper_81279.pdf
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    References listed on IDEAS

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    1. Egger, Peter & Winner, Hannes, 2005. "Evidence on corruption as an incentive for foreign direct investment," European Journal of Political Economy, Elsevier, vol. 21(4), pages 932-952, December.
    2. Lorenzo Pellegrini & Reyer Gerlagh, 2004. "Corruption's Effect on Growth and its Transmission Channels," Kyklos, Wiley Blackwell, vol. 57(3), pages 429-456, August.
    3. Barreto, Raul A., 2000. "Endogenous corruption in a neoclassical growth model," European Economic Review, Elsevier, vol. 44(1), pages 35-60, January.
    4. Méon, Pierre-Guillaume & Weill, Laurent, 2010. "Is Corruption an Efficient Grease?," World Development, Elsevier, vol. 38(3), pages 244-259, March.
    5. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    6. d’Agostino, Giorgio & Dunne, J. Paul & Pieroni, Luca, 2016. "Government Spending, Corruption and Economic Growth," World Development, Elsevier, vol. 84(C), pages 190-205.
    7. 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.
    8. Ivar Kolstad & Arne Wiig, 2013. "Digging in the dirt? Extractive industry FDI and corruption," Economics of Governance, Springer, vol. 14(4), pages 369-383, November.
    9. Mo, Pak Hung, 2001. "Corruption and Economic Growth," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 66-79, March.
    10. Noel Johnson & William Ruger & Jason Sorens & Steven Yamarik, 2014. "Corruption, regulation, and growth: an empirical study of the United States," Economics of Governance, Springer, vol. 15(1), pages 51-69, February.
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    12. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
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    More about this item

    Keywords

    Corruption; Economic Growth; Panel data;

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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