The Political Economy of Corruption & the Role of Financial Institutions

Kira Boerner () and Christa Hainz

No wp892, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

Abstract: In many developing and transition countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people in a corrupt country suffer from high corruption levels. Our model is based on the fact that corrupt offcials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system and, more importantly, as the rents from corruption are distributed differently. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, increase the political support for anti-corruption measures.

Keywords: Corruption; Financial Markets; Institutions; Development; Voting (search for similar items in EconPapers)
JEL-codes: D72 D73 H11 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-dev, nep-pke and nep-pol
Date: 2007-10-01
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2007-892

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