Public Goods, Corruption and Growth

In this paper growth implications of corruption are analysed. In order to establish the link from corruption In the public sector to private capital accumulation and growth, a Ramsey-type model is employed. Income redistribution and inefficiency in public good provision are the main distortions caused by corruption. The income redistribution distorts the private investment decisions, while the Inefficiency in public sector increases its burden on the private sector and makes less public input available to the firms. It is shown that both effects of corruption lead to lower growth. Moreover, the model provides a new mechanism that explains the deviation of the optimal tax rate from the degree of public sector externality by incorporating corruption into the dynamic general-equilibrium framework.