Developing Rotten Institutions

24 Pages Posted: 18 Nov 2005

See all articles by Morgan Kelly

Morgan Kelly

University College Dublin (UCD) - Department of Economics

Date Written: October 2005

Abstract

This paper models corruption as optimal parasitism in organizations where teams of agents are weakly restrained by principals. Each agent takes on part of the role of principal, choosing how much to invest in policing to repress corruption in others and how rapaciously to act when unpoliced opportunities arise. This simple model can incorporate many factors stressed in empirical analyses of corruption, and gives rise to a wide variety of equilibria. Allowing income to co-evolve with corruption, we show how adding corruption to a textbook exogenous growth model leads to a Lucas paradox. When income and corruption affect each other sufficiently strongly, economies converge to two corner equilibria despite diminishing returns to capital: a rich, clean corner and a poor, corrupt one; a pattern that appears to characterize international data.

Keywords: Corruption, growth

JEL Classification: O17, O40

Suggested Citation

Kelly, Morgan, Developing Rotten Institutions (October 2005). CEPR Discussion Paper No. 5281, Available at SSRN: https://ssrn.com/abstract=851237

Morgan Kelly (Contact Author)

University College Dublin (UCD) - Department of Economics ( email )

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Dublin 4, Dublin 4
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