The Political Economy of Corruption and the Role of Financial Institutions

In transition and developing countries, we observe rather high
levels of corruption even if they have democratic political
systems. This is surprising from a political economy perspective,
as the majority of people generally suffers from high corruption
levels. Our model is based on the fact that corrupt officials have
to pay an entry fee to get lucrative positions. In a probabilistic
voting model, we show that a lack of financial institutions can
lead to more corruption as more voters become part of the corrupt
system. Well-functioning financial institutions, in turn, can
increase the political support for anti-corruption measures.