Corruption and Disposable Risk

Corrupt bureaucrats manipulate rules and regulations to coerce the private agents to pay bribes. In such an environment the cost of dealing with the public sector is uncertain as the regulations are not observed as they are originally defined. Combined with weak enforcement and compliance, predation of corrupt bureaucrats makes private disposable income volatile. We study this uncertainty within a stochastic dynamic growth model framework, where we generalize the corruption caused uncertainty as a shock to disposable income of agents. Consequently, corruption creates two adverse effects in the economy: higher risks associated with private investments and lower returns on private capital due to increased public burden. Both effects tend to lower the demand for investments, thus long run growth is compromised in the economy with the corrupt public sector.