Growth, public investment and corruption with failing institutions |
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Authors: | David de la Croix Clara Delavallade |
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Institution: | (1) Department of Economics and CORE, Université catholique de Louvain, Louvain-la-Neuve, Belgium;(2) Present address: J-PAL South Asia, Chennai, India |
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Abstract: | Corruption is thought to prevent poor countries from catching up with richer ones. We analyze one channel through which corruption
hampers growth: public investment can be distorted in favor of specific types of spending for which rent-seeking is easier
and better concealed. To study this distortion, we propose a dynamic model where households vote for the composition of public
spending, subject to an incentive constraint reflecting individuals’ choice between productive activity and rent-seeking.
In equilibrium, the structure of public investment is determined by the predatory technology and the distribution of political
power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no
effective corruption but the possibility of corruption still distorts the allocation of public investment. We test the implications
of the model on a set of countries using a two-stage least squares estimation. We find that developing countries with high
predatory technology invest more in housing and physical capital in comparison with health and education. The reverse is true
for developed countries.
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Keywords: | Public investment Corruption Political power |
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