Corruption in an Unstable Environment

In this paper we study the influence of economic stability on the
level of corruption in a country, where high stability is defined
as a low level of variance in economic output growth. We present a
political competition model with exogenous shocks to economic
output where politicians can decide about the level of corruption
and an election is held within the framework of a Bayesian game.
Corruption is assumed to be harmful to the economy and politicians
try to maximize income from corrupt activities as well as the
probability of getting reelected. We show that independent of the
absolute size of economic output growth a low degree of economic
stability yields a high level of corruption and vice versa. Thus we
conclude that not only does corruption influence economic activity,
but also the opposite effect might exist, namely that exogenously
caused fluctuations of output influence the readiness of
politicians to behave in a corrupt manner. To support our
theoretical findings we additionally carry out a cross-country
empirical analysis of GDP growth variance and corruption and come
to results confirming our thesis.