Testing for Granger Causality between Corruption and Governance

Keita Kouramoudou and Hannu Laurila
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Hannu Laurila: School of Management, University of Tampere

No 1601, Working Papers from Tampere University, Faculty of Management and Business, Economics

Abstract: In the economic literature, a common view is that corruption is more an institutional problem than a market failure: malfunctioning bureaucracy makes firms turn to corruption. Following this viewpoint, major International Financial Institutions urge developing countries to improve their governance in order to secure efficiency in all international transactions. Still, some observers claim that rent-seekers deliberately provoke institutional malfunctioning in order to extract private gains. This is to say that corruption is a built-in element of poor governance. This paper tackles this endogeneity issue by testing for Granger causality between bad governance and corruption. The test utilizes dynamic panel data of 117 countries, consisting of World Bank’s WGI indicators from 1996 to 2013. The paper finds substantial proof for causal effects between poor governance and corruption, the causal direction depending on specific measures of the quality of governance. In particular, the findings show that global anti-corruption efforts have made these causalities clearer, and that they depend on country-specific socio-economic mentalities.

Keywords: endogeneity; governance indicators; institutions (search for similar items in EconPapers)
JEL-codes: D73 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-03
New Economics Papers: this item is included in nep-pol
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http://urn.fi/URN:ISBN:978-952-03-0088-3 First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tam:wpaper:1698

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