Corruption and public debt: a cross-country analysis

ABSTRACT

Using data from a large panel of countries over the period 1995–2015, this article empirically investigates the effect of corruption on public debt. Overall, the estimates reveal that corruption increases public debt. The effect, however, appears to be heterogeneous across income-related sample splits: it is stronger for advanced economies, but weaker and less statistically robust for less-developed countries, where external factors such as foreign aid may also affect public debt. The analysis suggests the inadequacy of conventional wisdom assuming that more detrimental fiscal effects of corruption arise in low-income countries.

KEYWORDS:

• Corruption
• public debt
• cross-country analysis

JEL CLASSIFICATION:

• D73
• H63
• O50

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The main results are confirmed if (i) an alternative proxy (the Heritage Foundation’s Freedom from Corruption Index) is used for corruption; (ii) all variables are considered endogenous, except year dummies; and (iii) system generalized method of moments (GMM) and fixed effects are used instead of difference GMM. In checks (ii) and (iii) the number of instruments is too high, weakening the Hansen test (p-values equal to 1). Therefore, difference GMM is used. The estimates of the robustness analysis, not shown for the sake of space, are available upon request.

Additional information

Funding

This work was partially supported by Parthenope University of Naples, under grant ‘Bando di sostegno alla ricerca individuale - annualità 2016’