Corruption: The Good, the Bad, and the Uncertain

This paper argues that the relationship between corruption and economic growth is dependent upon the uncertainty involved. Employing data on a cross‐section of countries, this paper uses an interaction between the frequency of bribery payments and the uncertainty regarding the delivery of the service in exchange for these bribes to show that corruption has a negative association with growth unless the uncertainty is minimal. Furthermore, the negative association becomes larger in magnitude with higher levels of uncertainty. At extremely high levels of uncertainty a relatively small increase in corruption, equivalent to moving from Sweden to the United States for example, is associated with economically large decreases in economic growth.

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