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Why does Public Investment Fail to Raise Economic Growth? The Role of Corruption

In an endogenous growth model with information asymmetry between the government and the bureaucracy, the bureaucrats can falsely report of high‐quality high‐cost procurement, while providing low‐quality low‐cost product. This reduces the quality of public services, but inflates the public spending,...

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Bibliographic Details
Published in:The Manchester school 2015-12, Vol.83 (6), p.623-651
Main Authors: Haque, M. Emranul, Kneller, Richard
Format: Article
Language:English
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Summary:In an endogenous growth model with information asymmetry between the government and the bureaucracy, the bureaucrats can falsely report of high‐quality high‐cost procurement, while providing low‐quality low‐cost product. This reduces the quality of public services, but inflates the public spending, which in effect reduces growth. We test our results by using three‐stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.
ISSN:1463-6786
1467-9957
DOI:10.1111/manc.12068