Corruption and Investment: Theory and Evidence from China

Publisher:
ELSEVIER
Publication Type:
Journal Article
Citation:
Journal of Economic Behavior and Organization, 2020, 175, pp. 40-54
Issue Date:
2020-07-01
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© 2020 Elsevier B.V. We consider a principal-agent model to examine the conditions under which corruption prompts investment. We also investigate three policies that can be used to combat corruption: strengthening monitoring, increasing compensation, and enhancing accountability. Our theory suggests that increasing monitoring intensity mitigates corruption at the cost of reduced investment. The most cost- effective policy to control corruption is to enhance accountability, which reduces corruption without decreasing growth-enhancing investment. We test our theo- retical predictions using Chinese infrastructure investment and corruption data. The data show that infrastructure investment is negatively correlated with anti- corruption effort, as predicted by the theoretical model.
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