Endogenous Corruption in Economic Development

Abstract

This paper presents an analysis of the joint determination of bureaucratic corruption and economic development. The analysis is based on a simple neo-classical growth model in which bureaucrats are employed as agents of the government to collect taxes from households. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with households to provide false information to the government. Costly concealment of this activity leads to a loss of resources available for productive investments. The incentive for a bureaucrat to accept a bribe depends on economy-wide outcomes, which in turn, depend of the number of other bureaucrats who accept bribes. We establish the existence of multiple of development regimes, together with the possibility of multiple, frequency-dependent equilibria. The predictions of our analysis accord strongly with recent empirical evidence.

Keywords: Corruption, Bribery, Tax Evasion, Development

JEL Classification: D73, H26, O11