Corruption: Political Determinants and Macroeconomic Effects

Two aspects of corruption are examined theoretically: its effect on macroeconomic variables, and its determination from the political environment. Corruption is defined in an occupational choice model as the extra fees or bribes that must be paid by some entrepreneurs. Even in an environment of perfect information and well-defined property rights, wages and total output decrease with the level of corruption. Inverted-U relationships of income inequality with both corruption and output are calculated. Second, two types of decentralization, regional and bureaucratic, are analyzed. The effects depend crucially on agents' mobility across regions. Under imperfect mobility assumptions, corruption decreases with regional decentralization and increases with bureaucratic decentralization. Two methods of controlling corruption are analyzed in this setting: democratic accountability and incentive payments. The same factor that makes bureaucratic decentralization more corrupt makes it more resistant to efforts to rein in corruption; the reverse is true for regional decentralization. This model matches emerging stylized facts relating corruption to output, inequality, and decentralization, and reinterprets findings linking bureaucratic wage levels and corruption.