Corruption and Capital Flight: An Empirical Assessment

This paper considers the role of corruption in impelling capital flight. Identifying corruption as one dimension of poor governance, the empirical analysis explores direct linkages between corruption and capital flight in a broad sample of countries. The novelty of this investigation is that it is based on a portfolio choice model of asset allocation that explicitly recognizes corruption as contributing to the variance of domestic investment risk. The main testable proposition emerging from our theoretical specification is stated thus: does corruption impel capital flight by raising the risk of domestic investment, ceteris paribus? An econometric analysis suggests that, holding other determinants of capital flight constant, corruption does have a positive and significant impact on capital flight. Based on these results, the paper concludes that advocating good governance by combating corruption makes a great deal of sense for countries aiming to staunch capital flight. JEL CLASSIFICATION: G11, F32