Essays on corruption

Abstract

This dissertation is comprised of two papers. In the first one, titled "Public Investment and Corruption in an Endogenous Growth Model," I provide an endogenous growth model with Ramsey taxation that is consistent with empirical findings regarding public investment, corruption, and economic growth. In the model, government maximizes the weighted average of consumers' utility and its own utility coming from expropriation of tax revenues. The weight determines the benevolence of the government. I show that a self-interested government sets a higher public-to-private-capital ratio than a benevolent one in order to increase the before-tax returns to private investment and hence increase tax revenues that can be expropriated. However, after-tax returns to private investment are lower and hence the growth rate is lower. Another result is that self-interested governments choose a high level of non-productive public investment, which provides a channel for the government to expropriate tax revenues for its private gain, thereby inflating total public investment. In the second paper, titled "Self-selection of Politicians and Corruption," I, together with my coauthor Evsen Turkay, build a citizen-candidate model, in which agents are heterogenous with respect to their honesty and they choose whether to become entrepreneurs or run for politics. We characterize the subgame perfect equilibrium of the model and analyze the effects of changing exogenous parameters, such as politicians' salaries, entrepreneurial profits and campaigning costs, on the equilibrium outcome.