Corruption and Openness

Avi Simhon, M. Daniele Paserman and Zvika Neeman (zvika@post.tau.ac.il)

No 4057, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a neoclassical growth model with endogenous corruption. Corruption and wealth, which are co-determined in equilibrium, are shown to be negatively correlated. Richer countries tend to be less corrupt, and corrupt economies tend to be poorer. This observation gives rise to the following puzzle: if poorer countries do indeed experience higher levels of corruption, and if indeed as suggested by a number of empirical studies corruption hampers growth, then how did rich countries, who were poor once, become rich? Our answer is simple. In the past, economies were mostly ?closed? in the sense that it was difficult to transfer illicit money outside of the economy. In contrast, today?s economies are mostly open. In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy?s productive capital. In contrast, in today?s open economies, corrupt agents smuggle stolen money abroad depleting their country?s stock of capital. We confirm this intuitive explanation by testing the hypothesis that the effect of corruption on wealth depends on the economy?s degree of openness using cross-country data.

Keywords: Corruption; Growth; Openness (search for similar items in EconPapers)
JEL-codes: F20 H00 O10 O40 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-dev and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Corruption and Openness (2008)
Working Paper: Corruption and Openness (2006)
Working Paper: Corruption and Openness (2004)
Working Paper: CORRUPTION AND OPENNESS (2003)
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