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Corruption and Investment: Theory and Evidence from China

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  • Zheng, Bingyong
  • Xiao, Junji

Abstract

We consider a principal-agent model to examine the conditions under which corruption prompts investment. We also investigate three policies that can be used to combat corruption: strengthening monitoring, increasing compensation, and enhancing accountability. Our theory suggests that increasing monitoring intensity mitigates corruption at the cost of reduced investment. The most cost- effective policy to control corruption is to enhance accountability, which reduces corruption without decreasing growth-enhancing investment. We test our theo- retical predictions using Chinese infrastructure investment and corruption data. The data show that infrastructure investment is negatively correlated with anti- corruption effort, as predicted by the theoretical model.

Suggested Citation

  • Zheng, Bingyong & Xiao, Junji, 2020. "Corruption and Investment: Theory and Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 40-54.
    • Handle: RePEc:eee:jeborg:v:175:y:2020:i:c:p:40-54
    DOI: 10.1016/j.jebo.2020.03.018
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    Cited by:

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    2. Liu, Tingting & Liu, Yu & Ullah, Barkat & Wei, Zuobao & Xu, Lixin Colin, 2021. "The dark side of transparency in developing countries: The link between financial reporting practices and corruption," Journal of Corporate Finance, Elsevier, vol. 66(C).
    3. Olivier Marie & Thomas Post & Zihan Ye & Xiaopeng Zou, 2024. "From Two Heads to One: The Short-Run Effects of the Recentralization of Political Power in Rural China," Tinbergen Institute Discussion Papers 24-040/V, Tinbergen Institute.
    4. Wu, Kai & Liu, Jiming, 2022. "Purifying political ecology: How anti-corruption campaign affects capital structure decisions?," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    5. Andrieş, Alin Marius & Plopeanu, Aurelian-Petruş & Sprincean, Nicu, 2023. "Institutional determinants of households’ financial investment behaviour across European countries," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 300-325.
    6. Huanming Wang & Xiaoyun Sun & Yu Shi, 2024. "Commercial investment in public–private partnerships: the impact of government characteristics," Local Government Studies, Taylor & Francis Journals, vol. 50(1), pages 230-260, January.
    7. Zhiyong Yao & Yao Huang, 2023. "Quid pro quo," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 29-61, February.
    8. Nesrine Dardouri & Abdelkader Aguir & Ramzi Farhani & Mounir Smida, 2023. "Revisiting the Determinants of Investment- The Case of Tunisia," Post-Print hal-04101430, HAL.
    9. Cooke, Fang Lee & Wang, Jingtian & Wood, Geoffrey, 2022. "A vulnerable victim or a tacit participant? Extending the field of multinationals and corruption research," International Business Review, Elsevier, vol. 31(1).
    10. Shenghui Tong, 2022. "Corruption and anti‐corruption in China: a review and future research agenda," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 36(1), pages 3-16, May.
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    More about this item

    Keywords

    Corruption; Investment incentive; Infrastructure development; China;
    All these keywords.

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H4 - Public Economics - - Publicly Provided Goods
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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