We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters : the Òtechnology of corruptionÓ is the ease with which rent-seekers can capture a proportion of public spending. The Òconcentration of political powerÓ is the extent to which rent-seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and incime growth are determined simultaneously and show that income growth is more affected by our proxies for legal and politiccal institutions in countries where political rights and judicial institutions respectively are limited.
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Find related papers by JEL classification: O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models H50 - Public Economics - - National Government Expenditures and Related Policies - - - General D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
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