Do High Levels of Economic and Political Freedom Cause Less Corruption?

Abstract

A growing body of evidence documents numerous and deleterious economic and social consequences of corruption. These findings beg the question: How to reduce corruption? We exploit exogenous sources of variation in latitude, ethno linguistic fractionalization, settler mortality rates, legal origin and initial values of economic and political freedom as instrumental variables for economic freedom and political freedom. We document the existence of a negative, robust, statistically significant and economically consequential impact of economic and political freedom on corruption and both freedoms are complementary. However, “horse race” results suggest that economic freedom trumps political freedom in the effort to deter corruption.

Keywords: Corruption, Economic freedom, Political freedom

JEL Classification: D73, O5, P10, P20