Endogenous Corruption in Economic Development∗

This paper presents an analysis of the joint determination of bu-reaucratic corruption and economic development. The analysis is based on a simple neo-classical growth model in which bureaucrats are employed as agents of the government to collect taxes from house-holds. Corruption is reflected in bribery and tax evasion as bureau-crats conspire with households in providing false information to the government. Costly concealment of this activity leads to a loss of re-sources available for productive investments. The incentive for a bu-reaucrat to accept a bribe depends on economy-wide outcomes which, in turn, depend on the number of other bureaucrats who accept bribes. We establish the existence of multiple development regimes, together with the possibility of multiple, frequency-dependent equilibria. The predictions of our analysis accord strongly with recent empirical evi-dence