Corruption and Public Service in an Extended Solowian Growth Model with Endogenous Labor Supply

Abstract

This study examines the impact of bureaucratic corruption on economic growth of a small open economy. The economy is composed of two types of households (the workers and the officials) and two sectors (the industrial sector and public sector). Corruption may occur in different parts of the economy. We built a model for analyzing the role of corruption on economic growth, income and wealth distribution between the officials and workers. The model takes account of corruption in the capital market, the labor market, and production sector. It describes dynamic interactions of growth, corruption with endogenous tax rate and different exogenous corruption rates. We simulate motion of the dynamic system and demonstrate how an increase of corruption in the production sector, in the labor market, and other parameters affect the transitory process and long-run state of economic growth.