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Summary This paper investigates the relationship between corruption, the shadow economy, and public debt. It additionally examines whether the shadow economy increases the adverse effects of corruption on public debt. The model is empirically tested for 126 countries over 1996–2012. Using Ordinary Least Squares (OLS), Fixed effects, system generalized method of moments (GMM) and instrumental variable estimation, and two measures of corruption—the Transparency International Corruption Perceptions Index and the Kaufmann et al. Corruption Index—results confirm that increased corruption and a larger shadow economy lead to an increase in public debt. Results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements. Results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt, similarly, higher government expenditure enhances the effects of corruption on government debt. Hence reducing corruption should be a primary policy goal of governments. Given the complementarity detected between corruption and the shadow economy, reducing corruption would also lead to a fall in the size of the shadow economy and public debt. Reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure. [ABSTRACT FROM AUTHOR]

This paper analyses how corruption-induced income uncertainty affects the relationship between corruption and economic growth. The analysis reveals both the growth-enhancing and deteriorating effects of corruption that transmit through the income and productivity channels, and shows how income uncertainty caused by corruption interacts with both of these effects. In particular, it is found that an increase in bribe rates and the probability of corruption that reduces the burden of regulations generate counteracting effects on income and productivity, where both effects are further aggravated by corruption-induced income uncertainty. On the other hand, a higher burden of bribes imposed by extortive bureaucrats hampers growth unambiguously. However, in a highly corrupt environment, an increase in the incidence of extortive behaviour can be growth enhancing as it reduces income uncertainty, while if corruption levels are relatively low, then a further increase in the incidence of such behaviour deteriorates growth. These findings give us a new insight into why the overall growth effect of corruption is ambiguous. [ABSTRACT FROM AUTHOR]

The existing empirical evidence suggests that in low-income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two-way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low-income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41 ) [ABSTRACT FROM AUTHOR]