Corruption in a model of growth: Political reputation, competition and shocks

The article tries to incorporate "political corruption'' (top level corrupt ion) into economic growth analysis. We propose a microeconomic framework. A n agent of the public sector, who wants to optimize his cash flow resulting from budget misappropriations, will be highly sensitive to the instability related to his office. The natural equilibrium for the politician will be to fall into a 'high political instability - low growth' trap, in which cor ruption appears endemic. However, the control of corruption by society will be possible. We consider a model in which alternative politicians compete with the incumbent politician but benefit from a common political reputatio n. It is shown that this situation leads to "dynamic collective reputation' ', which should restrain misappropriation practices. This theoretical frame work will be useful in defining a "sustainable'' degree of political compet ition and in understanding the asymmetric effects of extrinsic shocks on th e growth process.