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Corruption and Financial Intermediation in a Panel of Regions: Cross-Border Effects of Corruption

Muhammad Majeed () and Ronald MacDonald ()

No 2011-67, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: The importance of financial market reforms in combating corruption has been highlighted in the theoretical literature but has not been systemically tested empirically. In this study we provide a first pass at testing this relationship using both linear and nonmonotonic forms of the relationship between corruption and financial intermediation. Our study finds a negative and statistically significant impact of financial intermediation on corruption. Specifically, the results imply that a one standard deviation increase in financial intermediation is associated with a decrease in corruption of 0.20 points, or 16 percent of the standard deviation in the corruption index and this relationship is shown to be robust to a variety of specification changes, including: (i) different sets of control variables; (ii) different econometrics techniques; (iii) different sample sizes; (iv) alternative corruption indices; (v) removal of outliers; (vi) different sets of panels; and (vii) allowing for cross country interdependence, contagion effects, of corruption.

Keywords: corruption, contagion effects; , financial Intermediation, panel data, (search for similar items in EconPapers)
Date: 2011
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