ABSTRACT
Corruption hampers state building and economic development. Corrupt officials and politicians embezzle funds intended for the provision of basic public services and the construction of infrastructure (e.g., Olken 2007; Reinikka and Svensson 2005; Shleifer and Vishny 1993). Corruption makes the political legitimacy of the state more dubious and undermines democracy (e.g., Rose-Ackerman 1999). Bribes discourage firms' investments, including foreign direct investments, like taxes (e.g., Mauro 1995; Wei 2000), but bribes damage firm growth more severely than taxes (Fisman and Svensson 2007), probably because the secrecy and uncertainty accompanied by bribery increase transaction costs (Shleifer and Vishny 1993). Cross-country studies find that corruption hinders the economic growth of developing countries significantly (e.g., Mauro 1995).
