Growth and welfare effects of corruption penalties |
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Institution: | 1. Universidade do Porto, Faculdade de Economia, and CEFUP, Portugal;2. Instituto Politécnico do Porto, Instituto Superior de Contabilidade e Administração do Porto, and CEOS.PP, Portugal |
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Abstract: | This paper analyses the steady-state effect of business corruption penalties on economic growth, corruption and welfare. To that end, the baseline horizontal R&D growth model is extended to include corruption, which is generated in intermediate goods production. Taxation on corruption depresses profits in production but also wages, leading to labor being reallocated from production to R&D, and, therefore, to a higher economic growth rate. Moreover, it also reduces corruption and increases welfare if preferences towards a corruption-free environment are strong enough. The results are in line with the data observed for 15 EU countries. |
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Keywords: | Horizontal growth model Consumer’s welfare Corruption |
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