Corruption, Public Expenditure, and Human Capital Accumulation

In this paper we investigate the effect of corruption on human capital accumulation through two channels. The first channel is through the effect of corruption on the public expenditure on education and the second channel is through the effect of corruption on the physical capital investment. Public expenditure on education affects positively human capital, while physical capital can obsolete human capital. Initially, we construct an endogenous two-sector growth model with human capital accumulation and by considering corruption as an exogenous variable we try to explore the impact of corruption on the allocation of public expenditure and as such on the distribution of human capital across different sectors. The theoretical model’s results suggest that corruption has different effects on human capital accumulation through the two channels. Then we use a smooth coefficient semiparametric model to capture possible non-linearities, and the results support the existence of nonlinearities between human capital and corruption.