Endogenous Probability of Detection in a Simple Model of Corruption and Growth

Economic and rent-seeking outcomes are determined jointly in a dynamic general equilibrium model of corruption, public spending and growth. In an economy with government intervention and capital accumulation, state-appointed bureaucrats are responsible for providing public goods, which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to appropriate public funds with an endogenous probability of being detected and punished. Given this probability, which depends on aggregate outcomes, each agent maximises her expected lifetime utility by choosing consumption and savings. The model produces multiple development regimes, which yield different predictions about corruption, public spending and investment depending on initial conditions. These predictions accord strongly with the empirical evidence on corruption and development. JEL classification: D73, H41, K42, O11, O17