Endogenous corruption in economic development

The purpose of this paper is to present an analysis of the joint determination of bureaucratic corruption and economic development.

The analysis is based on a simple model of growth 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 in providing 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 on the number of other bureaucrats who accept bribes. The paper establishes the existence of multiple development regimes, together with the possibility of both history‐ and frequency‐dependent equilibria. The predictions of the analysis accord strongly with recent empirical evidence.

The paper provides insights into the issue, and in doing so, makes further inroads to the macroeconomics of misgovernance.