Corruption is recognised as a major standing block to development and is associated with injustice and abuse of power. The consensus on the detrimental effects of corruption stands in contrast with the lack of agreement on the set of phenomena that fall under the heading ‘corruption’ and there is little discussion on whether the economics of corruption should also include corruption in the private sector. This question is relevant since different foci will have different theoretical bases and policy ramifications. We analyse the issue from two complementary perspectives: whether the impacts of corruption are limited to corruption in the public sector and whether a large public sector is associated with more corruption.
First, we review theoretical and empirical perspectives on corruption, showing how concern over corruption in the private sector has a long history, dating back to Marshall and Coase. Second, we analyse corruption’s determinants using a panel data approach. The econometric analysis demonstrates how our indicator of government involvement in the economy is a poor predictor of corruption prevalence. Finally, the paper highlights the policy implications of the one-sided focus on corruption in the public sector and proposes an explicit acknowledgment of the role of corruption in the private sector.
