Corruption and Long-run Growth: A Framework

Abstract

Y. Dissou and T. Yakaustava. 2012. “Corruption, Growth and Taxation,” Theoretical Economics Letters, 2(1): 62–66, develop a theoretical model to underpin the passive understanding that, corruption lowers the marginal product of capital; hence, the growth of the economy. The channel of effect emphasised in the study is a reduced return on investment via an arbitrary tax. By this, corruption adversely affects the productivity (and thus under a ‘continuous context’ assumption, productivity growth) of private capital thereby, implicitly affecting long-run growth. In this paper, the long-run effect of corruption is emphasized. The investment channel is retained but the route differs: investment quality rather than tax effect is stressed. Additionally, the human capital or labor productivity channel is developed to show that a significant fall in total factor productivity growth would be the ultimate result of corrupt practices. In the two cases, trappings of institutional corruption are discernible. Different permutations and likely results are indicated. Essentially, this note is a theoretical expose. The model outlined applies to the typical capitalist economy where corrupt practices are usually exposed and not always swept under the carpet. The representative agents, firms and workers, are assumed to be rational. The basic premise as influenced by the presentation in (R. L. Miller and D. D. Vanhoose. 1993. Modern Money and Banking, McGraw-Hill Inc., New York & Co., pp. 693–695) is that corruption causes the full information natural level of output to fall below the full-capacity output via its productivity growth impact. An endogenous model of the AK variety can be augmented by an externality term deriving from average human capital that is expected to influence output growth positively. The assumption of increasing returns of the endogenous model ensures that in a steady state, changes in each of the right hand-side variables continue to positively influence output; that is, positive second derivative. Int Adv Econ Res (2014) 20:245–246 DOI 10.1007/s11294-014-9464-1