Public expenditures, bureaucratic corruption and economic development

This paper presents a dynamic general equilibrium analysis of public sector
corruption and economic growth. In an economy with government
intervention and capital accumulation, state-appointed bureaucrats are charged
with the responsibility for procuring public goods which contribute to
productive efficiency. Corruption arises because of an opportunity for
bureaucrats to appropriate public funds by misinforming the government about
the cost and quality of public goods provision. The incentive for each
bureaucrat to do this depends on economy-wide outcomes which, in turn,
depend on the behaviour of all bureaucrats. We establish the existence of
multiple development regimes, together with the possibility of multiple,
frequency-dependent equilibria. The predictions of our analysis accord strongly
with recent empirical evidence on the causes and consequences of corruption
in public office.