Bad Corruption And Good Corruption

This paper uses cross-country data to examine situations in which corruption may in fact be beneficial.
To do so, this paper separates corruption into two parts: bad corruption, or corruption which
is related to poor institutions, and residual corruption, or corruption which is uncorrelated with other
governance characteristics. In accordance with previous research, I find that bad corruption negatively
affects economic development. However, I find that residual corruption is positively correlated with
GDP growth, capital accumulation and productivity growth in countries with poor institutions. My
findings suggest one important dimension of corruption which has not yet been documented: that
corruption may help overcome the harmful effects of bad corruption associated with poor institutions.
Let us first define corruption as use of public office for private gains.1 Using this definition, it
is not clear that corruption is bad for a country’s overall welfare. For example, Leff (1964) and
Huntington (1968) suggest that under rigid regulation and inefficient bureaucracy, corruption might
foster economic growth. In their model, agents use "speed money" to get around bad laws and
institutions. Additionally, Lui (1985) shows that bribery can be efficient in a queuing model if agents
with higher values of time can use bribes to obtain a better place in line.Download PDF now.