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Corruption and Reform

Author

Listed:
  • Susanto Basu
  • David D. Li

Abstract

Countries making the transition to a market economy often experience an increase in corruption along with an increase in growth. This observation is puzzling in the context of current models, which emphasize the destructive nature of corruption. We present a model of corruption and reform which shows that under some circumstances a particular gradualist reform strategy is optimal. This strategy consists of temporarily relaxing control of corruption in order to provide a windfall to existing bureaucrats, thereby gaining their support for a reform effort that will ultimately reduce the distortions stemming from bureaucratic power. Thus, a one-time surge of corruption can be a prelude to a permanently reduced level of corruption in the future, which provides the incentive for high current growth. We illustrate our point with examples from the recent Chinese reform.

Suggested Citation

  • Susanto Basu & David D. Li, 1996. "Corruption and Reform," William Davidson Institute Working Papers Series 55, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1996-55
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39445/3/wp55.pdf
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    Cited by:

    1. John Fernald & John H. Rogers, 2002. "Puzzles In The Chinese Stock Market," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 416-432, August.
    2. Samia Tavares, 2005. "Does Rapid Liberalization Increase Corruption?," Public Economics 0507003, EconWPA, revised 31 Aug 2005.
    3. Gregory C. Chow, 2003. "Challenges of China;s Economic System for Economic Theory," Microeconomics 0306002, EconWPA.

    More about this item

    Keywords

    corruption; transition; reform; property rights;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
    • P - Economic Systems
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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