How does corruption affect public debt? An empirical analysis

Cooray, Arusha, Dzhumashev, Ratbek, and Schneider, Friedrich (2017) How does corruption affect public debt? An empirical analysis. World Development, 90. pp. 115-127.

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Abstract

This paper investigates the relationship between corruption, the shadow economy, and public debt. It additionally examines whether the shadow economy increases the adverse effects of corruption on public debt. The model is empirically tested for 126 countries over 1996–2012. Using Ordinary Least Squares (OLS), Fixed effects, system generalized method of moments (GMM) and instrumental variable estimation, and two measures of corruption—the Transparency International Corruption Perceptions Index and the Kaufmann et al. Corruption Index—results confirm that increased corruption and a larger shadow economy lead to an increase in public debt. Results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements. Results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt, similarly, higher government expenditure enhances the effects of corruption on government debt. Hence reducing corruption should be a primary policy goal of governments. Given the complementarity detected between corruption and the shadow economy, reducing corruption would also lead to a fall in the size of the shadow economy and public debt. Reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure.

Item ID: 69188
Item Type: Article (Research - C1)
ISSN: 1873-5991
Keywords: corruption, government expenditure, public debt, shadow economy
Copyright Information: © 2016 Elsevier Ltd. All rights reserved
Date Deposited: 21 Oct 2021 00:35
FoR Codes: 38 ECONOMICS > 3801 Applied economics > 380112 Macroeconomics (incl. monetary and fiscal theory) @ 50%
38 ECONOMICS > 3801 Applied economics > 380113 Public economics - public choice @ 50%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150205 Fiscal policy @ 50%
15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150207 Macro labour market issues @ 50%
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