Corruption and Disposable Risk

Dzhumashev, Ratbek (2008): Corruption and Disposable Risk.

Abstract

Corrupt bureaucrats manipulate rules and regulations to coerce the private agents to pay bribes. In such an environment the cost of dealing with the public sector is uncertain as the regulations are not observed as they are originally defined. Combined with weak enforcement and compliance, predation of corrupt bureaucrats makes private disposable income volatile. We study this uncertainty within a stochastic dynamic growth model framework, where we generalize the corruption caused uncertainty as a shock to disposable income of agents. Consequently, corruption creates two adverse effects in the economy: higher risks associated with private investments and lower returns on private capital due to increased public burden. Both effects tend to lower the demand for investments, thus long run growth is compromised in the economy with the corrupt public sector.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corruption, public input, growth, burden
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; D - Microeconomics > D9 - Intertemporal Choice > D99 - Other

References

Acconcia, A. (2006). Endogenous Corruption and Tax Evasion in a Dynamic Model. CSEF University of Naples.

Aiyagari, S. R. (1994). Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659684.

Aizenman, J. and N. Marion (1993). Policy uncertainty, persistence, and growth. Review of International Economics 1, 145-163.

Aizenman, J. and N. Marion (1999). Volatility and investment: Interpreting evidence from developing countries. Economica 66(262), 157-179.

Angeletos, G.-M. (2007). Uninsured idiosyncratic investment risk and aggregate saving. Review of Economic Dynamics 10, 130.

Angeletos, G.-M. and L. Calvet (2006). Idiosyncratic production risk, growth, and the business cycle. Journal of Monetary Economics 53, 1095-1115.

Angeletos, G.-M. and L.-E. Calvet (2004). Incomplete Market Dynamics in a Neoclassical Production Economy. National Bureau of Economic Research, Inc, NBER Working Papers No. 11016.

Angeletos, G.-M. and L.-E. Calvet (2005). Incomplete-market dynamics in a neoclassical production economy. Journal of Mathematical Economics 41(4-5), 407-38. Barelli, P. and S. d. A. Pessoa (2002). A model of Capital Accumulation and Rent seeking. CARESS Working Paper No. 02-06. Available at SSRN: http://ssrn.com/abstract=317239.

Barreto, R. A. (2000). Endogenous corruption in a neoclassical growth model. European Economic Review 44(1), 35-60.

Bewley, T. (1977). The permanent income hypothesis: A theoretical formulation. Journal of Economic Theory 16, 252-292.

Calvet, L. (2001). Incomplete markets and volatility. Journal of Economic Theory 98, 295-338.

Campos, J. E. L. (2001). Corruption : the boom and bust of East Asia. Quezon City: Ateneo de Manila University Press.

Corsetti, G., P. Pesenti, and N. Roubini (1999). Paper tigers? A model of the asian crisis. European Economic Review 43(7), 1211-1236.

Denizer, C., M. Iyugun, and A. Owen (2000). Finance and Macroeconomic Volatility. World Bank Policy Research Paper No. 2487.

Easterly, W., R. Islam, and J. Stiglitz (2000). Shaken and stirred, explain growth volatility. Technical report, World Bank.

Eaton, J. (1981). Fiscal policy, inflation, and the accumulation of risky capital. Review of Economic Studies 48, 435-445.

Eichhorn, C. (2006). Optimal Policies in the Presence of Tax Evasion. Ph. D. thesis, Ludwig-Maximilians University.

Gertler, M. and E. Grinols (1982). Monetary randomness and investment. Journal of Monetary Economics 10, 239-258.

Grier, K. B. and G. Tullock (1989). An empirical analysis of cross-national economic growth, 1951-1980. Journal of Monetary Economics 24, 48-69.

Grinols, E. and S. Turnovsky (1993). Risk, the nancial market, and macroeconomic equilibrium. Journal of Economic Dynamics and Control 17, 1-36.

Grinols, E. and S. Turnovsky (1998). Risk, optimal government nance and monetary policies in a growing economy. Economica 65(259), 401-427.

Huggett, M. (1997). The one-sector growth model with idiosyncratic shocks. Journal of Monetary Economics 39, 385-403.

Huntington, S. P. (1968). Political Order in Changing Societies. New Haven, CT: Yale University Press.

Kormendi, R. and P. Meguire (1985). Macroeconomic determinants of growth: Cross-country evidence. Journal of Monetary Economics 16, 141-163.

Krusell, P. and A. Smith (1998). Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106(5), 867-896.

Le, N. (1964). Economic development through bureaucratic corruption. American Behavioral Scientist 8(3), 8-14.

Lin, W.-Z. and C.-C. Yang (2001). A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth. Journal of Economic Dynamics and Control 25, 1827-184.

Liu, F. T. (1985). An equilibrium queuing model of bribery. Journal of Political Economy 93, 760-781.

Liu, F. T. (1996). Three aspects of corruption. Contemporary Economic Policy 14(3), 26-29.

Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics 110, 681-712.

Mauro, P. (1998). Corruption and the composition of government expenditure. Journal of Public Economics 69(2), 263-279.

Mauro, P. (2004). The persistence of corruption and slow economic growth. IMF Staff Papers 51(1), 1-18.

Ramey, G. and V. A. Ramey (1995). Cross country evidence on the link between volatility and growth. American Economic Review 85, 1138-1151.

Rivera-Baitiz, F. L. (2002). Governance, and economic growth: Theory and evidence. Review of Development Economics 6(2), 225-247.

Rose-Ackerman, S. (1998). Corruption and Development. World Bank.

Rose-Ackerman, S. (1999). Corruption and government : causes, consequences, and reform. Cambridge: Cambridge University Press.

Rose-Ackerman, S. (2002). Grand corruption and the ethics of global business.

Journal of Banking & Finance 26(9), 18891918. Rose-Ackerman, S. (2004). Corruption. Kluwer Academic.

Shleifer, A. and R. W. Vishny (1993). Corruption. The Quarterly Journal of Economics 108(3), 599-617.

Tsai, S.-Y., C. C. Chen, E. K. Yeh, J. Dawson, and E. Stephenson (1997). The link between volatility and growth: Evidence from the states. Economic Letters 55(3), 365-369.