The Two‐Way Relationship between Government Spending and Corruption and its Effects on Economic Growth

17 Pages Posted: 22 Feb 2014

See all articles by Ratbek Dzhumashev

Ratbek Dzhumashev

Monash University - Department of Economics

Date Written: April 2014

Abstract

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth.

JEL Classification: H3, O11, O41

Suggested Citation

Dzhumashev, Ratbek, The Two‐Way Relationship between Government Spending and Corruption and its Effects on Economic Growth (April 2014). Contemporary Economic Policy, Vol. 32, Issue 2, pp. 403-419, 2014, Available at SSRN: https://ssrn.com/abstract=2399710 or http://dx.doi.org/10.1111/coep.12025

Ratbek Dzhumashev (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

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