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Public Investment and Growth: The Role of Corruption

M. Emranul Haque () and Richard Kneller ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: In this paper, we examine the growth effects of public investment in the presence of corruption. Our methodology improves on previous research on this topic by explicitly recognizing the role of simultaneity between public investment, corruption and growth and the possible biases arising from omission of correlated variables from the single reduced form equation based analysis. We use three-stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.

Pages: 22 pages
Date: 2008
New Economics Papers: this item is included in nep-dev, nep-pbe and nep-pol
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