How Does Corruption Differ from Taxation?

Ratbek Dzhumashev†

August 2, 2010

Abstract

This paper incorporates corruption of bureaucrats into an endogenous growth

model à la Barro (1990). The rent-seeking of corrupt bureaucrats results in lower
tax revenue and inefficient use of public funds, which in turn decreases the amount
of productive public inputs.This effect has bearing on the returns on private capital,
as it reduces private productivity. However, by encouraging noncompliance among
private agents, corruption may also decrease the public sector burden on the pro-
ducers. Therefore, the overall growth effect of corruption depends on the trade-off
between less burden and less returns on private capital, and hence, may be posi-
tive or negative. In this paper, the condition under which the overall growth effect
of corruption can be identified is revealed, and the possibility of positive growth-
enhancing corruption level is demonstrated. Furthermore, it is shown the effects of
corruption are also critical in determining the optimal size of the government.

Keywords: Corruption, Optimal Taxation, Economic Growth

JEL classification: H26, H21, D91,O11 , O41

∗
I thank Arye Hillman, Yew-Kwang Ng, Keith Blackburn, Been-Lon Chen, David Levine, and partici-
pants of workshops at ANU and Monash University for useful comments.
†
Department of Economics, Monash University, ratbek.d@buseco.monash.edu

1
1 Introduction

1.1 Overall brainstorming

Both taxation and corruption is viewed by the taxpayers as a mechanism used to extract
income from private agents. However, taxes always unambiguously increase the direct
burden of the public sector, though in return may increase the productive input provided
by the public infrastructure and services. Overall, it can be shown that optimal average
tax is positive due to productive spending.
Corruption is used as an optional way of trading-off the direct burden by paying bribes
instead of taxes. That is bribes must be less than the tax liability itself to be an option
for the taxpayer. This gain comes at cost of a decrease in the productive inputs as
tax revenue decreases by corruption induced tax evasion. It should be also noted that
this rent-seeking is costly (costlier than just compliance to taxation) so it leads to more
inefficiency from this point of view too. If we assume that overall corruption still leads to
gains by decreasing direct burden of the public sector, then the net effect depends on the
relative loss incurred to firms through the decrease in the productive inputs. That means
that if the tax rate is exceeding the optimal tax rate and the public sector efficiency is
low (the impact of its productive input on private production is relatively low), then it is
possible that the optimal corruption level is positive.

1.2 The rest....

The literature on economic effects of corruption reveals that corruption can be both
efficiency enhancing and deteriorating due to its complex nature.1 Most importantly,
1
For example, Fisman and Svensson (2007), Alesina and Angeletos (2005), Aidt (2003), Ali and
Isse (2003), Tanzi and Davoodi (2000), Bardhan (1997), Keefer and Knack (1997), Shleifer and Vishny
(1993), Alam (1989), and Abed and Gupta (2002) among many others find that corruption has a
substantial adverse effect of economic growth by creating a tremendous burden on the private sector.

2
corruption is recognized as a phenomenon mostly caused by the public sector activities.
The rationale for linking the economic effect of corruption to the efficiency of the public
sector is the following. There exists a large body of literature which shows that the
services and infrastructure provided by the public sector play an important role in private
production, and, as a consequence, on growth.2 Misusing public power through rent
seeking, corrupt bureaucracy distorts the purpose and functionality of the public sector.
This effect of corruption is confirmed by Rajkumar and Swaroop (2008), Blackburn et al.
(2005), Delavallade (2006), who find that the impact of public spending depends on the
quality of governance.
In connection with this, one can note that the key contributions to the analysis of
corruption have focused on investigating separately implications of either the income re-
source redistribution or the inefficiency in the public sector caused by corruption. For
example, Del Monte and Papagni (2001), Mauro (2002), Blackburn et al. (2006) incor-
porate inefficiency of the public sector as misuse of public funds which leads to lower
productive public inputs to aggregate production, although other effects of corruption
have not been accounted for. Analogously, Keefer and Knack (2002), Barreto (2000)
find the corrupt rent-seeking misallocates public resources from productive use. Gupta
et al. (2001), Mauro (1998), and Tanzi and Davoodi (1998) empirically have shown that
corruption distorts the composition of government expenditure in favor of less productive
activities. In other studies the effect of corruption is modeled as a burden imposed on
private agents. For example, Barelli and Pessoa (2002), Blackburn et al. (2005) consider
However, the literature dubbed as "the grease on the wheel" suggests that corruption can be efficiency
improving. For example, Leff (1964) suggests that corruption that decreases red tape can be beneficial
for economic growth. Similar views are shared by Huntington (1968) and Liu (1985, 1996).They view
corruption as an optimal response to market distortions that lessens the burden of regulations, and thus,
improves efficiency.
2
The seminal papers by Barro (1990) and Barro and Sala-i Martin (1992) propose that government
services can be treated as a productive input. Further extensions of Barro’s model by Futagami et al.
(1993), Turnovsky (1996), Tsoukis and Miller (2003), Chen (2006) show importance of the public sector
in economic growth.

3
the impact of corruption stemming from redistribution of income through extraction of
output from productive firms. Guriev (2004) finds that corruption increases the cost of
red tape for private agents.
Nevertheless, the literature lacks analyses of the effect of corruption where both income
redistribution and public sector inefficiency considered together. To address this gap in
the literature, this paper extends Del Monte and Papagni (2001) model in two important
directions: i) the effect of collusive corruption on the burden of taxation is accounted
for, ii) extortion of income by corrupt bureaucrats from the private agents has been
incorporated into the model. From this perspective, the model developed in this paper
can viewed as a synthesis of the corrupt behavior of bureaucracy explained by Shleifer and
Vishny (1993) into an endogenous growth model à la Barro (1990).
Another issue the paper tackles is as follows. Analyzing enforcement of property
rights by corrupt bureaucrats Acemoglu and Verdier (1998), and analyzing the officials’
actions that involve the exercise of discretion and cannot be monitored perfectly, Klitgaard
(1988) have shown theoretically the possibility of the positive output-maximizing level of
corruption. In line with this reasoning, Sepulveda and Mendez (2006) find empirically for
the cross-section of countries that the growth-maximizing level of corruption is, in fact,
positive. However, this result has not been theoretically generalized to the overall effect
of the public sector with possibility of corruption. In connection with this by considering
a more general setting with the public sector that not only creates a burden but also
provides productive input to private production, the paper shows the possibility of a
growth optimizing positive corruption level.
Finally, this paper offers insights into the conditions that determine the optimal size
of the public sector in the presence of bureaucratic corruption. This issue has not been
investigated before in the literature.
The main results of the paper are as follows. Corruption strictly reduces the provision

4
of public productive inputs, although the public sector burden can be either increased or
decreased. The overall effect of corruption on growth depends on whether the gain in
private disposable income through corruption can more than offset the loss in produc-
tivity due to the lower public input provision and extortion. The numerical simulations
demonstrate possibility of both growth-enhancing and growth-deteriorating overall effects
of corruption. Therefore, the overall effect of corruption on economic growth depends on
the tradeoff between a decrease in productive input provided by the government and a
decrease in the burden created by the same government.
These opposing effects of corruption are also critical in determining the optimal size of
the government. The results obtained in the paper outline the optimality conditions for the
government size. If corrupt bureaucrats tend to prey on taxpayers rather than colluding
with them, then the optimal government size should be less than the Barro’s benchmark.
If corruption is mostly collusive, then the optimal size of the government should exceed
the Barro’s benchmark. These optimality conditions can be used in designing an optimal
fiscal policy that accounts for both the efficiency of the public sector and the degree of
corruption.
The rest of the paper is structured as follows: Section 2 presents the discussion of the
model and its implications. Section 3 examines the optimal public sector size when the
bureaucrats are corrupt, and section 4 concludes the analysis.

2 The model of an economy with corruption

The model employed in the analysis draws on the endogenous model developed in Del
Monte and Papagni (2001) which is in turn based on Barro (1990). In this section, first
each type of agents are described, then their optimizing behavior is considered. Further,
based on the solution of the agents’ problems, the equilibrium of the model is defined,

5
and the growth implications of bureaucratic corruption are discussed.
Note, in general the public sector interacts with the private sector in two broad fields,
regulations and public goods provision. The regulations are designed to deal with exter-
nalities or to address other socioeconomic concerns, and can be viewed as constraints
imposed on the agents. Due to its restrictive nature, compliance to regulations is costly.
Therefore, with imperfect monitoring, private agents have an incentive not to comply to
regulations and increase their disposable income by cutting the cost of regulation com-
pliance. To deal with this issue, governments hire bureaucrats to monitor private agents’
compliance, and allow them to punish non-complying private agents. However, when pri-
vate agents are detected for noncompliance they may collude with corrupt bureaucrats.3
In this case, the private agents are not punished for noncompliance in a legal sense, in-
stead they pay bribes to corrupt bureaucrats, which are usually less than the statutory
penalty. Hence, this type of collusion is beneficial for both the bureaucrat and the non-
complying agent, as both parties capture rents. However, there is no reason to believe
that corruption always occurs in the form of collusion between private and public agents.
In fact, corruption can often lead to situations when bureaucrats extort bribes from honest
citizens, by abusing their authority of discretion when enforcing regulations.4 As a result
of these conflicting effects, the impact of corruption on the burden of the public sector
borne by private agents is ambiguous.
The other important aspect of the public sector is manifested through the services
and infrastructure provided by the public sector. As mentioned above, efficient supply
of government services and infrastructure is crucial for private productivity. However,
corrupt governments often tend to collect less tax revenues and utilize the scarce public
funds inefficiently.5 As a result, a corrupt government’s contribution to private productivity
3
See e.g. Shleifer and Vishny (1993).
4
See e.g. Myrdal, 1976; Sleifer and Vishny, 1993; Polinsky and Shavell, 2001.
5
Mauro (1998) did find evidence of the contention that relatively corrupt governments tend to favor

6
by means of providing infrastructure, rule of law, and other services is reduced.

2.1 The Agents

Following Blackburn (2006), I assume that the economy is populated with two-types of
agents: one type is involved in private production, the other type is involved in public
good production. Hence, there is no social mobility in this model. This assumption seems
reasonable for economies with robust corruption in public ranks.6 The difference between
the two agents lies in their occupation, not in their preferences. In terms of preferences
R∞
both types of agents are identical and maximize utility function given by U = 0 u(ct )dt.
The population is assumed to be static and the number of people is normalized at unity;
a fraction of population equal to 1 − λ are workers, and the rest, λ, are bureaucrats.
Worker Households: The worker households supply labor and capital to firms and
R∞
maximize the intertemporal utility given by U = 0 u(ct )dt, subject to their budget
constraint. For simplicity, I assume that there is one member in each household endowed
with one unit of labor, supplied inelastically. The households generate income by working
for firms and by holding assets, a2t , which are claims on the physical capital used by the
firms.
Bureaucrats: The members of the bureaucrat families work for the public sector
and produce public inputs. A bureaucrat’s objective is to maximize intertemporal utility
function of the same form as the producer agent. The bureaucrats generate their income
by working for the government and by holding assets, a1t , just like the worker agents. It is
capital spending projects. Delavallade (2006) on the other hand finds that corruption distorts public
spending by reducing expenditure on health and social protection and increasing expenditure on defense.
Gupta et al. (2001), provide empirical results, on the positive and significant correlation between cor-
ruption and military spending as a share of GDP. Devarajan et al (1996) using data for 43 developing
countries find that an increase in the share of current expenditure has positive effects on economic growth,
while an increase in the share of capital expenditure denotes negative effects.
6
The role of elites in determination of institutions are discussed in Acemoglu and Robinson (2008).
These authors also model two distinct groups of agents: the elite and the citizens.

7
assumed that the bureaucrats are endowed with both monitoring and licensing functions.
Therefore, the bureaucrats are able to engage in both types of corruption, and can generate
additional income by collecting bribes from firms, which is discussed below in more detail.
Firms: There are identical N firms that use the technology given by the constant
returns to scale production function, y = Af (k(t), g(t)), where k(t) is the instantaneous
capital input per worker, g(t) is public sector input per worker in period t, and A is
the coefficient of technology. Output of the firms is taxed at a flat rate, τ . The firms
maximizes after-tax profit, hence, the profit maximization involves not only choosing the
production factors, but also the rate of tax compliance. If detected for noncompliance, the
firm pays either fines or bribes depending on whether the detecting bureaucrat is corrupt
or not.
Government: The (central) government hires and monitors bureaucrats. The gov-
ernment’s budget constraint is:

T + F = M + G, (1)

where T is the effective tax revenue, F is the amount of fines collected through penalty
for noncompliance, M is the cost of monitoring, G is the total productive public input
into private production. It is assumed that the government always balances its budget.
The government in this model is modeled as the executive branch of a broader public
sector.The government maximizes the effective public input into private production, G =
T − M + F (or public services), by choosing the monitoring effort, M = mπN , where
π is the parameter of the effort chosen by the government in combating corruption and
m is an exogenous cost parameter in per taxpayer terms. Hence, the effective values for
the public input, G, are found as an equilibrium outcome of the interactions between the
government, the bureaucrats, and the taxpayers (firms) for a given tax rate.

8
2.2 Bureaucracy and corruption

The bureaucrat is involved in the production of public inputs, licensing and monitoring
of the firms. When the bureaucrat is imperfectly monitored by the government, he or
she can abuse the public position and rent seek by being corrupt. This corruption can be
of two forms as classified by Shleifer and Vishny (1993): with theft and without theft.
Corruption with theft involves a collusion with a private agent and a concealment of the
noncompliance to regulations by the private agent in exchange for a bribe. The best
example of this type of corruption is tax evasion under corrupt tax inspectors. In the
case of corruption without theft, a bureaucrat behaves like a monopoly and provides a
public good or service with a markup. Generally, it means that the private agent pays for
the public good or service more than he is supposed to pay legally. In this situation, the
bureaucrat, using his public position forces private agents to pay bribes. As a result of his
corrupt activity in a public position, a bureaucrat increases his income by adding to his
salary, w, illegal income collected in the form of bribes, B.7

2.2.1 Bribes

As mentioned above, the bribes are of two types: the bribes collected through corruption
with theft, B1 , and the bribes collected through extortion (or corruption without theft),
B2 . The sum of these bribes then gives the total bribes collected by the bureaucrat:

B = B1 + B2 . (2)

The amount of bribes generated through corruption with theft, B1 , depends on several
factors such as: i) the probability of noncompliance by a private agent,pn ; ii) the degree of
noncompliance,  ∈ [0, 1]; iii) the probability of the detection of the act of noncompliance,
7
For simplicity, where it is not essential, I omit the time index.

9
p; iv) the rate of penalty applied to the infringement, θ > 1; v) the probability of the
bureaucrat being corrupt, pb ; vi) and the bribe rate, 0 < β1 < 1.
Within the representative framework the first factor is not relevant, as the representa-
tive agent will choose not to comply with the regulations as soon as the expected payoff
is positive. Therefore, it can be assumed that pn = 1.
The degree of noncompliance by a firm is determined as an optimal reaction to the
auditing and penalty strategy of the government, the probability of the bureaucrat being
corrupt, and his bargaining power. Denote by x taxable per worker income, found as
x = y − w − δk, where y is gross per worker output, w is the wage rate, δ is the
depreciation rate. Therefore, the firm saves (1 − )τ x by not complying entirely to the
regulations (e.g. evading taxes), and when caught it incurs a loss due to the penalty
imposed on it which is equal to θ(1 − )τ x. It is also assumed that a bribe is proportional
to the penalty to be paid for noncompliance, βθ(1 − )τ x. Given a bribe is paid only if
noncompliance is detected by a corrupt bureaucrat, the joint probability of bribery is given
by p · pb , which gives us the expected bribe amount in per worker terms: ppb βθ(1 − )τ x.
As such, the total amount of bribes collected by a bureaucrat is found as the product of
the bribe rate in per worker terms, multiplied by the number of workers per bureaucrat,
1−λ
n= λ
. Thus, if the degree of noncompliance is known, then given the other variables,
the amount of the bribes collected can be determined by:

B1 = β1 pb pθ(1 − )τ xn. (3)

Recall that the taxable income and the evasion rate are determined by the private agent,
while the penalty rate is set by the government and the detection probability is dependent
upon the amount of resources available for tax audit. Therefore, the bureaucrat treats the
tax rate, τ , taxable income of the taxpayer, x, the evasion rate, , the penalty rate, θ, and

10
the probability of detection, p, as given. Based on the simple idea that more resources
and better organized institutions lead to better monitoring of the bureaucrats, we assume
that the probability of detection is given by,

p = π p̂, (4)

where π is the parameter that captures the resources dedicated to monitoring, and p̂ is a
deep parameter of the detection probability which depends on the efficiency of the public
institutions.
The bribe rate, β1 , depends on the bargaining power of the detected private agent,
which in turn depends on the institutional setup of the economy, and the cost the bu-
reaucrat incurs, when caught for being corrupt. The bribe rate cannot exceed unity as
the private agent then chooses to pay the official penalty instead of the bribe.
The probability of being corrupt is determined endogenously taking into account the
cost involved in the process of corruption. To ensure that the equilibrium probability of
corruption satisfies, 0 < pb < 1, the cost to a corrupt bureaucrat is assumed to increase
at a higher rate than the bribe collected. The expected bribe rate, β1 pb , can be used as
a measure of the degree of corruption, and thus it can be related to the expected cost
incurred by the corrupt bureaucrat. This cost includes the penalties paid by the bureaucrat
if detected for corrupt behavior, and other costs they incur to conceal their corruption.
Following Chen (2003), I assume a convex cost function for corruption activity:8

cb1 = τ (1 − )x[pa ξβ1 pb + πψ(β1 pb )2 ].

When factored in τ (1 − ), the first term stands for the expected amount of penalties paid
8
Though in Chen (2003) this type of cost is related to tax evasion, the nature of the problem is quite
similar as we are considering a hidden activity with related costs.

11
for being corrupt, while the second term is the other costs associated with corruption.
Here, ξ is the penalty rate, ψ is the cost parameter, and pa is the probability of detection
for corruption. Following the rationale used in the case of tax evasion detection in equation
(4), this can be expressed as pa = π p̂a , where p̂a is a deep parameter capturing the quality
of public institutions. Incorporating the last assumption, we arrive at the following cost
function:
cb1 = πτ (1 − )x[ξ p̂a β1 pb + ψ(β1 pb )2 ]. (5)

Recall that π depends on the resources spent by the government on monitoring. Hence,
the more resources spent on monitoring activities, the higher the probability of detection
and punishment, and hence, the greater the cost of being corrupt. This cost also depends
on the degree of being corrupt, that is, the more rent the bureaucrat captures, the higher
the cost.
In general, the bureaucrat may choose the probability of being corrupt, pb , and the bribe
rate, β1 , separately. The bribe rate, β1 depends on the bargaining power of the taxpayer.
For simplicity, I assume that as a result of the bargaining process among taxpayers and
bureaucrats, the equilibrium bribe rate, β̂1 is attained and is well known to both parties.
This reduces the problem of the bureaucrat in regards to choosing the probability of being
corrupt, given the costs and benefits. Now, by accounting for the related costs we can
write the net expected bribes collected from a taxpayer through corruption with theft as:

h  i
2
B̄1 = nτ (1 − )xπ pb β̂1 p̂θ − ξ p̂a β̂1 pb + ψ(β̂1 pb ) . (6)

The second type of bribe generated by the bureaucrat is achieved by abusing the dis-
cretionary power in licensing and monitoring. The economic activities within the economy
are regulated and thus are subject to some sort of licensing implemented by the bureau-

12
crats. I assume that there is no legal cost involved for the private agent in order to get
the license, except for the cost of meeting the license requirements, which is normalized
at zero. However, using the monopolistic power the bureaucrat sells the permit with a
markup, β2 . The bureaucrat chooses to extort with some probability, 0 < pe < 1, and
this income re-distribution decreases taxpayers’ after-tax income. The amount of bribes
taken is then given by:
B2 = pe β2 (1 − τ )xn. (7)

Again, it is reasonable to assume that this type of corruption also incurs a cost to the
bureaucrat that increases with the degree of corruption. Similarly to the corruption with
theft, the expected bribe rate, pe β2 , can be used as a base to determine the expected cost
of being corrupt. This includes the fines imposed for being corrupt and the other costs
analogous to the case of corruption with theft. This extortion rate depends on the degree
of involvement of the public sector in private production in the form of red tape. That
is, the greater the extent of red tape for a given level of institutional quality, the more
opportunities there are for corrupt officials to extort income from the firms. The extortion
takes place during the monitoring process to enforce red tape. Hence, the extortion rate
can be related to the monitoring effort parameter π, and written as β2 = π β̂2 , where
β̂2 is a deep parameter depending on the overall quality of the public institutions. It
is assumed that the penalty rate for this type of corruption and the cost parameter are
the same as in the case of corruption with theft, and given correspondingly by ξ and ψ.
Accordingly, similar to the case of corruption with theft, we can write the bureaucrats’
cost of corruption without theft as

cb2 = (1 − τ )xπ[ξ β̂2 pe + ψ(β̂2 pe )2 ]. (8)

13
In sum, the bureaucrat chooses pe , and obtains the expected net bribe from corruption
without theft:
h  i
B̄2 = n(1 − τ )x pe β̂2 − π ξ β̂2 pe + ψ(β̂2 pe )2 . (9)

The expected amount of fines collected by the government from the bureaucrats that
are detected for corruption is equal to the sum of fines collected for the two types of
corrupt behavior, expressed as the first terms in equations (5) and (8), adjusted for the
penalty base correspondingly:

h i
Fb = N πξx (1 − )τ p̂a β̂1 pb + (1 − τ )β̂2 pe . (10)

2.3 The bureaucrat’s problem

Given the preferences and the budget constraint, the bureaucrat’s problem is stated as:

Z∞
max U1 = e−ρt u(c1t )dt, (11)
c1t ,pb ,pe
0

s.t. (9), (7),

ȧ1t = wt + B̄t + rt a1t − c1t , (12)

and a standard transversality condition.

To solve the problem, a present-value Hamiltonian is constructed, Jt :

Jt = u(c1t )e−ρt + νt wt + rt a1t + B̄t − c1t .

 

Then, the FOCs of the optimization problem are given by:

∂J
= 0 ⇒ ν1 = u0 (c1t )e−ρt , (13)
∂c1t

14
 ∂J p̂θ − ξ p̂a
= 0 ⇒ p∗b = , (14)
∂pb 2β̂1 ψ

∂J 1 − πξ
= 0 ⇒ p∗e = , (15)
∂pe 2π βˆ2 ψ

∂J
−ν̇t = ⇒ ν̇t = −νt rt ; (16)
∂a1t

From the FOCs we obtain the Euler equation, which yields the expression governing the
c1−σ −1
dynamics of consumption. Assuming that the utility function is given by u(c) = 1−σ
,
one can obtain a particular dynamic path of the representative bureaucrat’s consumption,
given by the following differential equation:

ċ1t 1
= (rt − ρ). (17)
c1t σ

The result is standard for this type of model, although, how the equilibrium interest rate
is determined, makes this result peculiar. This will be discussed below.

2.4 The household’s problem

The representative household is identical to the bureaucrat household in terms of prefer-

ences, but faces a different budget constraint. The representative household’s problem is

15
stated as follows:
Z∞
max
2
U2 = e−ρt u(c2t )dt, (18)
ct
0

s.t.
ȧ2t = wt + a2t rt − c2t , (19)

and a standard transversality condition.

It can be verified that the solution to the problem yields an identical consumption dynamic
path, as in the case with the bureaucrat agent:

ċ2t 1
= (rt − ρ). (20)
c2t σ

2.5 The firm’s problem

The representative firm takes the factor prices and tax administration parameters as given
and maximizes its after-tax profits. It is assumed that the firm pays wages and replaces
depreciated capital, and what is left is taxed as gross income. To maximize after-tax prof-
its, the firm chooses the fraction, , of output to be reported. This act of noncompliance
incurs costs to the evader. Again similar to the case with bureaucrats, it is assumed that
the cost schedule faced by the firms is convex with regards to the rate of noncompliance,
(1 − ), and given by ζ(1 − )2 , where ζ is the cost parameter used in the determination
of the cost of corruption. Hence, the expected profit is given as:

(1 − p) (1 − τ ) − ζ(1 − )2 x +
 

+p (1 − τ ) − ζ(1 − )2 − (pb β1 + 1 − pb )θτ (1 − ) x − rk.

 
(21)

16
For simplicity (21) is written as:

Π = (1 − τ̃ )x − rk,

where
τ̃ = ([1 − (pb β1 + 1 − pb )θ] + (pb β1 + 1 − pb )θ) τ + ζ(1 − )2 .

Clearly, τ̃ can be seen as the effective public sector burden borne by the firm. This burden
includes taxes, bribes, and fines paid. Given that the bribes paid are the same as the
bribes collected by the corrupt bureaucrats, we already know the burden of the bribes on
the firms. The expected amount of fines paid by the taxpayer is equal to

Ff = π p̄(1 − pb )(1 − )θτ x.

Substituting for x, after-tax profit which is given by:

Π = (1 − τ̃ ) [Af (k, g) − w − δk] − rk.

As explained above, in the course of licensing and monitoring, the predatory bureaucracy
extorts in the form of bribes a fraction, pe β̂2 , of the after-tax profit. This leaves the firms
with expected profit which given as:

Πe = (1 − pe β̂2 ) {(1 − τ̃ ) [Af (k, g) − w − δk] − rk} .

In light of this discussion, the firm’s objective is to maximize its expected profit by choosing
the per worker capital stock and the income declaration rate, or formally:

max Πe . (22)
,k

17
The FOC of this optimization with regards to the rate of income declaration, , gives us
the optimal rate of income declaration:
 
1 − θ + θpb (1 − β̂1 ) τ
=1− .
2ζ

p̂θ−p̂a ξ
Substituting for p∗b = 2β̂1 ψ
from (14) and solving for  yields the equilibrium income
declaration rate:

2βˆ1 ψ(1 − θ) + θ(1 − βˆ1 )(p̂θ − p̂a ξ)

∗ = 1 − τ . (23)
4ψζ β̂1

From the FOC of the profit maximization problem (22) we also obtain the the equi-
librium wage and interest rates:

0
w = f () − kAfk (), (24)

0
r = (1 − b)Afk () − δ, (25)

where
b = (1 − pe β̂2 )τ + pe β̂2 . (26)

2.5.1 Comparative statics for the income declaration rate

Using (23), it can be shown that the comparative static of the income declaration rate,
∗ , with regards to tax rate is negative:

∂∗
< 0.
∂τ

18
Therefore, in this setup we do not have the so called "Yitzhaki puzzle". Yitzhaki (1974),
shows that under standard assumptions, tax evasion falls with the rise in tax rates, which
is counter-intuitive and not supported by the data. In this aspect, the result obtained here
is similar to the finding by Chen (2003), although in his model corruption is not explicitly
integrated.
The other comparative statics for  are expressed as follows:

∂∗ ∂∗
> 0, > 0,
∂ψ ∂ζ
∂∗ ∂∗
< 0, > 0,
∂ p̂ ∂ p̂a
∂∗ ∂∗
> 0, ≷ 0.
∂ β̂1 ∂θ

Based on these results one can conclude that an increase in the cost parameter of corrup-
tion, ψ, the cost parameter of tax evasion, ζ, the probability of detection for corruption,
p̂a , and the bargaining power of bureaucrats expressed in the bribe rate parameter, β̂1 , all
lead to an increase in the declared income. Therefore, either increasing the direct cost of
tax evasion or the cost of corrupt bureaucrats improves the compliance among taxpayers.
On the other hand, an increase of the probability of detection for tax evasion given by
p̂, results in an increase in tax evasion. The idea behind this is that taxpayers offset the
increased cost of tax evasion because of higher detection by decreasing the rate of income
declaration. The effect of increasing the penalty rate for tax evasion is ambiguous and
dependent upon the sign of the following expression: 2β̂1 ψ + (1 − β̂1 )[ξ p̂a − 2p̂θ]. Only
if the penalty for being corrupt is high enough so that ξ p̂a − 2p̂θ > 0, an increase in the
penalty rate for tax evasion results in a strict increase in tax compliance. Otherwise, there
is a possibility that an increase in the penalty rate for tax evasion may lead to even more
tax evasion. These results are summarized as the following proposition.

19
Proposition 2.1 i) An increase in the tax rate, τ , the probability of detection for tax
evasion, p̂, leads to more tax evasion. ii) An increase in the cost parameter of corruption,
ψ, the cost parameter of tax evasion, ζ, the probability of detection for corruption, p̂a ,
and the bargaining power of bureaucrats, β̂1 reduces tax evasion.

2.6 The Government’s problem

Recall that the government’s problem is given by:

max G = T + F − M,
M

s.t. M = mπN,
h i
F = Fb + Ff = N πx ξ(1 − )τ p̂a pb β̂1 + ξ(1 − τ )pe β̂2 + p̂(1 − pb )(1 − )θτ .

The problem is of static nature as the government maximizes public sector production
each period, given the tax revenue for that period. By incorporating the constraints and
denoting g = G/N , I re-formulate the problem as:

h i
max g = (1 − )τ x + πx ξ(1 − )τ p̂a pb β̂1 + ξ(1 − τ )pe β̂2 + p̂(1 − pb )(1 − )θτ − mπ.
π

(27)
The FOC of (27) yields the following equilibrium condition:

m = ξ(1 − )τ p̂a pb β̂1 + ξ(1 − τ )pe β̂2 + p̂(1 − pb )(1 − )θτ. (28)

This result implies that the amount spent on monitoring should satisfy the efficiency
condition. Namely, the marginal cost of monitoring should be equal to the marginal
revenue collected through penalties. As a result, this condition should also satisfy the

20
equilibrium for the bureaucrat. Thus, by substituting for p∗e from (15) we write:

 
∗ 1 − πξ
m = ξ(1 − )τ p̂a pb β̂1 + ξ(1 − τ )β̂2 + p̂(1 − pb )(1 − )θτ.
2π βˆ2 ψ

Solving for π yields:

1 − τ
π∗ = , (29)
m − (1 − )τ S − (1 − τ )W

ξ2
where S = ξ p̂a p∗b β̂1 + θp̂(1 − p∗b ), and W = 2ψ
. It is clear that the optimal effort of the
government in combating tax evasion and corruption depends on the deeper parameters,
p̂ and p̂a , which are just the manifestation of the overall institutional quality. That
is, spending more resources on corruption monitoring without any improvements in the
institutional quality alone will not lead to better outcomes in terms of compliance.

2.7 Equilibrium

Equilibrium in the economy is defined as the streams of consumption {c1t , c2t }∞

0 , assets,

{a1t , a2t }∞ ∞ ∞ ∞
0 , physical capital, {kt }0 , prices, {rt , wt }0 , evasion rate, {t }0 , monitor-

ing effort of the government, {πt }∞ ∞

0 , corruption probabilities, {pbt , pet }0 , bribe rates,

{β1t , β2t }∞
0 , such that they satisfy the optimality conditions obtained for household’s,

firm’s, and government’s problems described above.

Given the economy is closed, the sum of all assets is equal to the amount of the
physical capital:
a1t λt + a2t (1 − λt ) = kt , (30)

where λt is the share of the bureaucrats in the total population. Hence,

k̇t = ȧ1t λt + ȧ2t (1 − λt ), (31)

21
or
k̇t = wt + λt B̄t + rkt − c1t − c2t − δkt . (32)

In a steady state, growth rates for capital and consumption are identical. Let us
c1−σ −1
assume that the utility function is given by u(c) = 1−σ
, then the consumption growth
is expressed as:
c˙t 1 1 0

= (r − ρ) = (1 − b)Afk () − δ − ρ . (33)
ct σ σ

Corruption not only alters the direct public sector burden, but also leads to lower
government inputs, g, as both tax evasion and the cost of monitoring are higher in the
presence of corruption. That is, the public productive input, in the absence of corruption,
is always greater, ceteris paribus; that is gn > g holds, where gn and g denote the
public productive input in the absence and presence of corruption, respectively. Recall
that fg0 (, g) > 0. Hence, we can define a productivity differential ratio that captures the
difference in the marginal product of capital in two different environments for some fixed
capital stock:
f 0 (k, gn )
χ= 0 > 1. (34)
f (k, g)

Now, we can state the following proposition that establishes the condition for the overall
growth effect of corruption.

Proposition 2.2 Suppose that the rate of statutory public sector burden, τ , government
monitoring parameters, π and m, and the production function are given. Then corruption
is growth enhancing only if the following condition is satisfied:

(1 − b) > (1 − τ )χ.

Otherwise, corruption deteriorates the growth potential of the economy.

22
Proof Observing the expression for the growth rate we establish that corruption is growth
enhancing only if the effective return to capital is higher under a corrupt regime, or if
(1 − b)f 0 (k, g) > (1 − τ )f 0 (k, gn ) holds. Then using (34) we arrive at (1 − b) > (1 − τ )χ.
Conversely, if (1 − b) < (1 − τ )χ, then (1 − b)f 0 (k, g) < (1 − τ )f 0 (k, gn ) must be true.
Hence, in the latter case corruption deteriorates growth. 

This result shows that for corruption to be growth enhancing, the gain from a de-
creased public sector burden should be greater than the loss from a decreased public
sector productivity externality. In other words, the effect of corruption on growth depends
on the interaction of collusive and extortive types of corruption. Most importantly, by
combining both effects of corruption, growth-enhancing and growth-deteriorating, this
result reconciles the so called "grease on the wheel" theory with the "sand on the wheel"
theory of corruption. "The sand and the grease on the wheel" theory suggested by this
result offers more a general framework to study the effects of corruption, as it accounts
for both collusive and extortive corruption within a unified model.To illustrate this point
I run some simulations of the model, which is presented in the next section.

2.8 A numerical illustration

In order to run simulations based on it, the analytical model needs to be adjusted. For
simplicity, I assume that collusive and extortive types of corruption are independent of
each other. Although, in general this might not be true. Nevertheless, this assumption
significantly simplifies the calculations and serves well for the illustration purposes. Let us
introduce two scalers which capture the impact of corruption on the public sector burden
as well as on its productive input to private production. Denoted by ξ1 is the scaler for the
effect of collusive corruption, and by ξ2 , is the scaler for the effect of extortive corruption.
As a baseline, we may assume some values for the public sector expenditure and the public

23
sector burden in the absence of corruption. Then by applying the corresponding scaler,
the no-corruption level of both the expenditure and the burden can be altered to reflect
the effect of corruption on these variables.

Figure 1: Growth rate surface. Higher public sector productive inputs, at the cost of lower public sector
burden are conducive for higher growth rates.

Recall that the growth rate in the economy, as considered here, is given by γ =
1 ∂y
σ
(r − ρ). It is known that r = (1 − b) ∂k − δ, where b is the overall public sector
burden, which, in the current context, becomes b = ξ1 ξ2 τ , where ξ1 < 1, and ξ2 > 1,
and τ is the average statutory tax burden. The rationale, behind the expression for
the public sector burden is based on the idea that corruption can both, decrease the
burden through collusion (captured by ξ1 ) and increase it through extortion (captured

24
Figure 2: Growth rate spread contours. Growth rates increase towards the right-bottom corner. De-
pending on the combination of the two effects of corruption, growth may rise or fall, as shown by the
arrows. Point A is no corruption point, so both public sector burden and inputs are not distorted.An
increase in the corruption may move the state of the economy either to point B or C, depending on
whether collusive or extortive corruption is more dominating.

by ξ2 ). I assume that collusive corruption decreases tax revenue, and hence, the public
expenditure. However, for the sake of tractability, I assume no embezzlement and no
efficiency losses in the production of public goods and services. Therefore, the public
sector productive expenditure is given by g = ξ1 τ y. Assuming the production function of
the form: y = Ak α g 1−α , and using the scalers introduced above, the growth rate in the
economy with corruption is written as:

1h 1 1−α
i
γ= (1 − τ ξ1 ξ2 )A (τ ξ1 )
α α −δ−ρ . (35)
σ

This equation is calibrated using benchmark values of σ = 0.98, α = 0.3, δ = 0.1,

ρ = 0.02, widely used in the literature. The tax rate, τ may vary in the range of

25
(20%-45%). Although, results presented in Figures 1-2 are based on an assumption that
τ = 40%. The technological (or TFP) coefficient, A is calibrated in a way that for
all other given parameters, equation (35) will results in reasonable growth rates. Now,
by changing values of ξ1 and ξ2 , one can find the corresponding growth rates. The
result of such a numerical exercise is given in Figures 1-2. In Figure 1, one observes
that a trade-off between higher public sector productive inputs, at the expense of lower
public sector burden is conducive for higher growth rates. In Figure 2, which exhibits
growth rate levels for different combinations of ξ1 and ξ2 , one also observes that growth
rates increase towards the right-bottom corner, where the positive effect of a decrease
in the public sector burden is more than offset by the negative effect of the decrease in
productive public spending. Therefore, depending on the combination of these two effects
of corruption, growth may rise or fall, as shown by the arrows. Here, point A is the no-
corruption point, so both public sector burden and inputs are not distorted. An increase
in corruption may move the state of the economy either to point B or C, depending on
whether collusive or extortive corruption is more dominating.
The size of the public sector captured by τ is exogenous to the taxpayers, as it is
determined by the government. However, there is no reason to believe that this parameter
is always set optimally by the government. In the next section, I will present an analysis
of the optimality condition for the public sector size. In this regard, it is clear that for an
economy with an oversized public sector (e.g. τ is above the optimal level), an increase
in collusive corruption while keeping extortive corruption unchanged, certainly is a growth
enhancing course of action. This underlying reason is likely to be behind the empirical
result obtained by Sepulveda and Mendez (2006), who find that the growth-maximizing
level of corruption is positive.

26
3 Optimal public sector size

Another important question is whether the size of the public sector in the economy with
corrupt bureaucrats should be larger or smaller as opposed to when corruption is absent?
We can use the Barro (1990) result as a benchmark and compare it with the outcomes of
the corruption model. Assume that production technology is defined as in Barro (1990),

g 
y = Akϕ .
k

1
Now, the general expression for the growth rate in this economy γ = σ
(r − ρ) should
be adjusted for this particular production technology. For the given production technology,
the after-tax marginal product of capital is given by:

∂y
r = (1 − b) = (1 − b)Aϕ(g/k)[1 − (g/y)ϕ0 ].
∂k

Hence, we can write the growth rate as:

1
γ= [(1 − b)Aϕ(1 − η) − δ − ρ] , (36)
σ

where η = τ̂ ϕ0 is the elasticity of y with respect to g for a given k. As seen here, the
growth rate captures the effects of corruption in two ways: first, by the change in the
burden of the public sector and second, by the change in the productive public input. We
use this knowledge to identify the optimality conditions for the public sector involvement
in an economy with corruption. This leads us to the following proposition.

Proposition 3.1 If with the increase of the public sector size the corrupt predatory
behavior dominates corrupt noncompliance, then an optimal government share in total
output should be less than the marginal contribution of the public sector. If corruption

27
induced noncompliance dominates the predatory behavior caused by corruption, then an
optimal government share should be greater than the marginal contribution of the public
sector.

g
Proof Taking the first derivative of γ with regards to τ̂ = y
yields the following9 :

dγ (37)
dτ
= 1
σ
[ϕ(ϕ0 − b0 ) + η(1 − b0 )] = 0.

This result enables us to write the expression for the optimal value of the government
input share for the case of the Cobb-Douglas production function:

g   g α
y = Akϕ = Ak ,
k k

as follows:
α( kg )α
τ̂ ∗ = (38)
b0 ( kg )α − α(1 − b0 )

It is clear that when the only burden created by the public sector is the tax burden, that
is b = τ̂ and hence, b0 = 1, condition (38) reduces to the Barro (1990) result: τ̂ ∗ = α.
However, if b0 > 1, then τ̂ ∗ < α, and if b0 < 1, then τ̂ ∗ > α. 

In addition, using the particular version of the growth rate given by (35), the optimal
tax rate is expressed by:
α
τ̂ ∗ = . (39)
(1 − α)ξ1 ξ2
9
The derivation is as follows:
dγ d
1
dτ = dτ υ [(1 − b)ϕ(1 − η) − ρ] 
= σ1 (1 − η) h−ϕb0 + (1 − τ̂ ) dτ
d
i (ϕ)
1 0 (1−τ̂ )ϕ0 ϕ
= σ (1 − η) −ϕb + 1−η
.
0
= 1
σ [−ϕb (1 − η) + (1 − τ̂ )ϕ0 ϕ]
1 0 0 0
= σ [ϕ(ϕ − b ) + η(1 − b )] = 0

d
(ϕ) is found by using the fact that g/k = τ̂ ϕ( kg ), which yields: d
(ϕ) = ϕ0 ϕ + τ̂ dτ̂
d


Here, dτ dτ̂ (ϕ) By
d ϕ0 ϕ ϕ0 ϕ
simplifying, we get ⇒ dτ (ϕ) = (1−τ ϕ0 ) = (1−η) .

28
Not surprisingly, the interpretation of this result is analogous to the more general case
given (38). However, it is straightforward to see how the two types of corruption affect
the optimality condition for the public sector size.
The policy implications of this result are the following. If corruption in the economy is
dominated by predatory behavior rather than collusion, then tax rate increases may lead
to greater losses in the tax base and consequently in tax revenue. The reason is that
the private agents will be subjected not only to a higher tax burden but also to a higher
predatory behavior, which can overwhelm the private gain from higher the levels of public
good production. The other important point to note is that the marginal contribution
of the public sector to output may be lower in economies with lower income levels and
a high corruption. That is, α of the Cobb-Douglas production function may be lower if
the institutional quality is poor, hence, even without additional burden of corruption, for
such countries the optimal tax rate also must be lower. These findings may be used in
the design of development policies.

4 Conclusion

Although maintained as a main channel through which corruption affects economic out-
comes, the literature lacks analyses the effect of corruption where major public-private
interactions represent the mechanisms through which corruption impedes the economy.
To address this issue, this paper extends Del Monte and Papagni (2001) model in two
important directions: i) the effect of collusive corruption on the burden of taxation is
accounted for, ii) extortion of income by corrupt bureaucrats from the private agents has
been incorporated into the model.
In general, the effect of corruption on private production is ambiguous. Corruption
strictly reduces the provision of public productive inputs, although the public sector burden

29
can be either increased or decreased. The overall effect of corruption on growth depends on
whether the gain in private disposable income through corruption can more than offset the
loss in productivity due to the lower public input provision. By encompassing both positive
and negative effects of corruption, the model developed in this paper offers a more general
framework for analysis. Moreover, this paper shows the possibility of a positive corruption
level in a more general setting. The numerical simulations demonstrate possibility of both
growth-enhancing and growth-deteriorating overall effects of corruption.This result has
not been theoretically generalized to the overall effect of the public sector with possibility
of corruption.
These opposing effects of corruption are also critical in determining the optimal size of
the government. The results obtained in the paper outline the optimality conditions for the
government size. If corrupt bureaucrats tend to prey on taxpayers rather than colluding
with them, then an optimal government size should be less than the Barro’s benchmark.
If corruption is mostly collusive, then the optimal statutory size of the government should
exceed the Barro’s benchmark.

References

Abed, G. T. and Gupta, Sanjeev (2002). Governance, corruption, and economic perfor-
mance. Washington, D.C: International Monetary Fund.

Acemoglu, D. and J.Robinson (2008). Persistence of Power, elites, and institutions.

American Economic Review 98(1), 267–293.

Acemoglu, D. and T. Verdier (1998). Property rights, corruption and the allocation of
talent: A general equilibrium approach. Economic Journal 108 (450), 1381–1403.

Aidt, T. S. (2003). Economic analysis of corruption: a survey. The Economic Journal 113,
F632–F652.

Alam, S. (1989). Anatomy of corruption: An approach to the political economy of

underdevelopment. American Journal of Economics and Sociology 48 (4), 441–456.

30
Alesina, A. and G.-M. Angeletos (2005). Corruption, inequality, and fairness. Journal of
Monetary Economics 52 (7), 1227–44.

Ali, A. M. and H. S. Isse (2003). Determinants of economic corruption: A cross-country

comparison. Cato Journal 22 (3), 449–466.

Barelli, P. and S. d. A. Pessoa (2002). A model of Capital Accumulation

and Rent seeking. CARESS Working Paper No. 02-06. Available at SSRN:
http://ssrn.com/abstract=317239.

Bardhan,P. (1997). Corruption and Development: A Review of Issues. Journal of Economic

Literature 35 (3), 1320–1346.

Barreto, R. A. (2000). Endogenous corruption in a neoclassical growth model. European

Economic Review 44 (1), 35–60.

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. The

Journal of Political Economy 98 (5 Part 2), S103–S125.

Barro, R. J. and X. Sala-i Martin (1992). Public finance in models of economic growth.
Review of Economic Studies 59, 645–661.

Blackburn, K., N. Bose, and M. E. Haque (2005). Public Expenditures, Bureaucratic

Corruption and Economic Development.. The University of Manchester, Centre for
Growth and Business Cycle Research, DPS 053.

Blackburn, K., N. Bose, and M. E. Haque (2006). The incidence and persistence of
corruption in economic development. Journal of Economic Dynamics & Control 30,
2447–2467.

Bose, N., S. Capasso, and A. P. Murshid (2008) Threshold Effects of Corruption: Theory
and Evidence. World Development 36 (7), 1173–1191.

Chen, B. L. (2003). Tax evasion in a model of endogenous growth. Review of Economic

Dynamics 6 (2), 381–403.

Chen, B. L. (2006). Economic growth with an optimal public spending composition.

Oxford Economic Papers 58, 123–136.

Coppier,R. and E. Michetti (2006). Corruption vs production. A non-linear relationship.

Economic Modelling 23, 622–637.

Delavallade, C. (2006). Corruption and Distribution of Public Spending in Developing

Countries. Journal of Economics and Finance 30(2), 222–239.

Del Monte, A. and E. Papagni (2001). Public expenditure, corruption, and economic
growth: the case of Italy. European Journal of Political Economy 170, 12–16.

31
Devarajan, S., V. Swaroop, and H. Zou, (1996). The Composition of Public Expenditure
and Growth. Journal of Monetary Economics 37, 313–344.

Dreher, A. and M. Gassebner (2007, June). Greasing the wheels of entrepreneurship?

The impact of regulations and corruption on firm entry. CESifo Working Paper Series
CESifo Working Paper No. 2013, CESifo GmbH.

Ehrlich, I. and F. T. Lui (1999). Bureaucratic corruption and endogenous economic

growth. The Journal of Political Economy 107 (No. 6 Part 2), 270–S293.

Fisman, R. and J. Svensson (2007) Are corruption and taxation really harmful to growth?
Firm level evidence. Journal of Development Economics 83(1), 63–75.

Futagami, K., Y. Morita, and A. Shibata (1993). Dynamic analysis of an endogenous

growth model with public capital. Scandinavian Journal of Economics 95, 525–607.

Gupta, S., de Mello. L., Sharan. R. (2001). Corruption and Military Spending. European
Journal of Political Economy 17, 749–777.

Guriev, S. (2004). Red tape and corruption. Journal of Development Economics 73,
489–504.

Huntington, S. P. (1968). Political Order in Changing Societies. New Haven, CT: Yale
University Press.

Keefer, P. and S. Knack (1997). Why don’t poor countries catch up? a cross-national
test of institutional explanation. Economic Inquiry 35, 590–602.

Keefer, P. and S. Knack (2002). Rent-seeking and Policy Distortions when Property
Rights are Insecure. Number 2910. The World Bank.

Klitgaard, R. (1988). Controlling Corruption. University of California Press, Berkeley.

Lambsdorff, J. G. (2003) How Corruption Affects Productivity. Kyklos 56(4), 459–476.

Leff, N. (1964). Economic development through bureaucratic corruption. American Be-

havioral Scientist 8 (3), 8–14.

Lin, S. and W. Zhang (2009). The effect of corruption on capital accumulation. Journal
of Economics 97 (1), 67–93.

Liu, F. T. (1985). An equilibrium queuing model of bribery. Journal of Political Econ-

omy 93, 760–781.

Liu, F. T. (1996). Three aspects of corruption. Contemporary Economic Policy 14 (3),

26–29.

32
Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics 110, 681–712.
Mauro, P. (1998). 69,

Mauro, P. (1998). Corruption and Composition of Government Expenditure. Journal of

Public Economics 69, 263–279.

Mauro, P. (2002). The persistence of corruption and slow economic growth. IMF work-
ing paper ; WP/02/213. Washington, D.C.: International Monetary Fund, Research
Department.

Meon, P.-G. and L. Weill (2006). Is corruption an efficient grease? A cross-country

aggregate analysis. In Public Choice Conference 2006, Amsterdam.

Polinsky, A. M. and S. Shavell (2001). Corruption And Optimal Law Enforcement. Journal
of Public Economics 81 (1), 1–24.

Rajkumar, A. S. and V. Swaroop (2008). Public spending and outcomes: does governance
matter? Journal of Development Economics 86 , 96–111.

Sepulveda, F. and F. Mendez (2006). Corruption, growth and political regimes: Cross
country evidence. European Journal of Political Economy 22 (1), 82–98.

Shleifer, A. and R. W. Vishny (1993). Corruption. The Quarterly Journal of Eco-

nomics 108 (3), 599–617.

Tanzi, V. and H. R. Davoodi (1998). Roads to nowhere : how corruption in public

investment hurts growth. Washington, D.C.: International Monetary Fund.

Tanzi, V. and H. R. Davoodi (2000). Corruption, growth, and public finances. IMF
working paper ; WP/00/182. Washington, D.C.: International Monetary Fund, Fiscal
Affairs Department.

Tsoukis, C. and N. J. Miller (2003). Public services and endogenous growth. Journal of
Policy Modeling 25, 297–307.

Turnovsky, S. J. (1996). Fiscal policy, adjustment costs and endogenous growth. Oxford
Economic Papers 48, 361–381.

Yitzhaki, S. (1974, May). A note on income tax evasion: Theoretical analysis. Journal of
Public Economics 3 (2), 201–202.

33