How Bad is Corruption? Cross-country Evidence of the Impact of Corruption on Economic Prosperity

Authors


  • The author thanks Thomas Barnebeck Andersen, Christian Sinding Bentzen, Carl-Johan Dalgaard, Joannes Jacobsen, Peter Norman Sørensen, an anononymous referee, and seminar participants at PhD seminars at the Department of Economics, University of Copenhagen for useful comments and suggestions. Errors are those of the author.

Bentzen: University of Copenhagen, Øster Farimagsgade 5, building 26, 1353 Copenhagen K, Denmark. Tel: +45-35324400; E-mail: Jeanet.Bentzen@econ.ku.dk.

Abstract

Most people today would argue that corruption is bad for countries' economic development. Yet, we still lack a reliable empirical estimate of the effect. This study addresses the econometric shortcomings of the literature and provides an estimate of the causal impact of corruption on gross domestic product per capita across countries. Certain dimensions of a country's culture are used as instruments for corruption. These instruments stay strong when the other deep determinants of economic development, geography, and the remaining dimensions of institutions and culture are controlled for. In the process of choosing controls, however, the entire set of variables available in the Quality of Governance online database (QOG) that includes all central variables from the literature on institutions and culture are included. It is found that corruption does exert a significant and negative impact on countries' productivity levels.

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