The Political Economy of Corruption & the Role of Financial Institutions

31 Pages Posted: 25 Jan 2008

See all articles by Christa Hainz

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Kira Fuchs

Seminar for Comparative Economics; Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES)

Date Written: October 2007

Abstract

In many developing and transition countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people in a corrupt country suffer from high corruption levels. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system and, more importantly, as the rents from corruption are distributed differently. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, increase the political support for anti-corruption measures.

Keywords: Corruption, Financial Markets, Institutions, Development, Voting

JEL Classification: D73, H11, D72, O17

Suggested Citation

Hainz, Christa and Fuchs, Kira, The Political Economy of Corruption & the Role of Financial Institutions (October 2007). William Davidson Institute Working Paper No. 892, Available at SSRN: https://ssrn.com/abstract=1086695 or http://dx.doi.org/10.2139/ssrn.1086695

Christa Hainz (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

Kira Fuchs

Seminar for Comparative Economics ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, 80539
Germany
+49 89 2180 2767 (Fax)

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