25 Pages Posted: 20 Jun 2011
Date Written: July 2011
We challenge the conventional definition of corruption through the analysis of legal forms of corruption, and by devoting special attention to influence induced by the private sector. This paper studies the determinants of the world pattern of legal and illegal corruption by proposing a simple theoretical model of endogenous corruption and related legal framework, and its thorough empirical test. Three types of equilibrium outcomes are identified: one based on illegal corruption, where the elite does not face any binding incentives to limit corruption; one centered around legal corruption, where the elite must incur a cost to legally protect corruption; and finally a no‐corruption outcome, where the population is able to effectively react to corruption. Testable implications from the model are derived based on country‐wide parameters. Crucially, we use a rich corporate survey, including 8,279 firms in 104 countries, tailored for this research, and featuring measures of legal corruption that are novel to the literature. The microdimension of the database enables improving on familiar shortcomings associated with the use of endogeneity‐prone, country‐wide indices of perceived corruption. The empirical results, making use of a broad range of proxies and sources, generally validate the model's explanations.
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