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The Political Economy of Corruption and the Role of Financial Institutions

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  • Boerner, Kira
  • Hainz, Christa

Abstract

In many developing countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people generally suffers from high corruption levels. We explain why citizens do not exert enough political pressure to reduce corruption if financial institutions are missing. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. The mode of financing this entry fee determines the distribution of the rents from corruption. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.

Suggested Citation

  • Boerner, Kira & Hainz, Christa, 2006. "The Political Economy of Corruption and the Role of Financial Institutions," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 135, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:135
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    References listed on IDEAS

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    Cited by:

    1. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo Group Munich.
    2. Rajeev Goel & Iftekhar Hasan, 2011. "Economy-wide corruption and bad loans in banking: international evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 21(7), pages 455-461.

    More about this item

    Keywords

    Corruption; Financial Markets; Institutions; Development; Voting;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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