The two-way relationship between government spending and corruption and its effects on economic growth

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Abstract

The existing empirical evidence suggests that in low-income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two-way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low-income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth.
Original languageEnglish
Pages (from-to)403 - 419
Number of pages17
JournalContemporary Economic Policy
Volume32
Issue number2
DOIs
Publication statusPublished - 2014

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