Developing Rotten Institutions

Morgan Kelly

No 5281, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper models corruption as optimal parasitism in organizations where teams of agents are weakly restrained by principals. Each agent takes on part of the role of principal, choosing how much to invest in policing to repress corruption in others and how rapaciously to act when unpoliced opportunities arise. This simple model can incorporate many factors stressed in empirical analyses of corruption, and gives rise to a wide variety of equilibria. Allowing income to co-evolve with corruption, we show how adding corruption to a textbook exogenous growth model leads to a Lucas paradox. When income and corruption affect each other sufficiently strongly, economies converge to two corner equilibria despite diminishing returns to capital: a rich, clean corner and a poor, corrupt one; a pattern that appears to characterize international data.

Keywords: Corruption; Growth (search for similar items in EconPapers)
JEL-codes: O17 O40 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-dev, nep-pol, nep-reg and nep-soc
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Working Paper: Developing rotten institutions (2005)
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