Unproductive Education in a Model of Corruption and Growth

This paper provides an explanation for recent empirical evidence on the heterogeneous effects of human capital on economic growth in developing countries. In a two-period overlapping generations economy with physical and capital accumulation, state-appointed bureaucrats are responsible for procuring productive public goods. Corruption arises because of an opportunity for bureaucrats to misappropriate public funds. The decision of the corruptible bureaucrat affects public finances and hence the capital accumulation in the economy. Alongside the positive productivity enhancing effect, human capital is assumed to increase the efficiency of corrupt bureaucrats in embezzlement. If the latter dominates the former, the incentive for bureaucrats to acquire education rises. The net effect may result in an insignificant (or even negative) effect of human capital on growth. Our main results are as follows: (1) corruption is always bad for economic development, but its effect is worse in the economy with (more) human capital; (2) the incidence of corruption may, itself, be affected by both the development and human capital level of the economy; (3) education is good for development when accompanied by good governance, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy.