Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240356 
Year of Publication: 
2020
Series/Report no.: 
BOFIT Discussion Papers No. 5/2020
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
Abstract: 
How do corruption and the state apparatus interact, and how are they connected to the political and economic dimensions of state capacity? Motivated by historians' analysis of powerful empires, we build a model that emphasizes the corrosive effect of corruption on state power. Under general assumptions about fat-tailed risk, we show that, if fiscal capacity is strong, then the optimal response for the head of the state apparatus will be an endogenous lexicographic rule whereby local corruption is maintained at such a level that no erosion of state power is tolerated. Comparative statics shows the impacts of additional risk of crisis on corruption tolerance as well as the complementarity between personalistic rule and corruption. Implications of corruption at the head of the state apparatus are also analyzed. If fiscal capacity is not sufficiently strong, however, the state will have to over-tolerate corruption to retain its affiliates, risking its control in crises. Our model predicts that the correlation between state's political stability and corruption is non-monotonic across different levels of fiscal capacity, and this prediction is robustly consistent with recent cross-country panel-data.
Subjects: 
Corruption
state apparatus
state capacity
crisis
erosion of stateauthority
bureaucracy
JEL: 
D73
H12
D02
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-316-4
Document Type: 
Working Paper

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