Bureaucratic Corruption and Economic Development

Abstract

Corruption is usually viewed as an impediment to investment and growth. However, China's experience suggests that the issue is probably more complex: In the past government officials would go out of their way to promote investment and development. But since the start of a far-reaching anti-corruption war, they have stopped doing their job and as a consequence, investment is delayed and the economy takes a hit. This paper examines the relationship between corruption and public infrastructure development. We consider a model in which bureaucrats can exert costly effort to promote infrastructure development and examine the conditions under which corruption prompts investment. We also explore how government can attack corruption with different policies. The paper shows that increasing monitoring intensity reduces investment as well as mitigates corruption. The most effective policy, however, is to increase accountability, which reduces corruption while at the same time not decreases growth-enhancing investment. Using Chinese data we provide suggestive evidence consistent with the theoretical model.

Keywords: Corruption, infrastructure development, China, investment incentive

JEL Classification: D7, H4, O12, O53