Corruption in an Unstable Environment∗

In this paper we study the influence of economic stability on the level of corruption in a country, where high stability is defined as a low level of variance in economic output growth. We present a political competition model with exogenous shocks to economic output where politicians can decide about the level of corruption and an election is held within the framework of a Bayesian game. Corruption is assumed to be harmful to the economy and politicians try to maximize income from corrupt activities as well as the probability of getting reelected. We show that independent of the absolute size of economic output growth a low degree of economic stability yields a high level of corruption and vice versa. Thus we conclude that not only does corruption influence economic activity, but also the opposite effect might exist, namely that exogenously caused fluctuations of output influence the readiness of politicians to behave in a corrupt manner. To support our theoretical findings we additionally carry out a cross-country empirical analysis of GDP growth variance and corruption and come to results confirming our thesis.