Higher levels of government expenditures and more regulation naturally invite corruption, because they provide the opportunity for government officials to be paid off for regulatory favors, subsidies, and government contracts. Some countries have relatively large governments but lower levels of corruption. Scandinavian countries offer examples. While institutional differences may explain some of the cross-country differences in corruption, the most consistent relationship is that high levels of regulation are associated with more corruption. When looking at the effect of the size of government, it is the regulatory state, rather than the productive or redistributive state, that is associated with corruption.
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The term has a moral connotation to it, but this paper does not consider moral corruption beyond the definition in this sentence. Private sector behavior might also be corrupt if, for example, an employee embezzles funds from his/her employer, but this is fraudulent activity done without the employer’s knowledge and, significantly for present purposes, the costs are borne by the private parties involved. Fraud therefore can be viewed as the private sector analog to public sector corruption. The empirical work, in this paper and in the literature more generally, measures corruption with regard to government activities, rather than private sector fraud or moral depravity.
The regulatory component of the EFW index aggregates 15 individual components into three broad areas: credit market regulations, labor market regulations, and business regulations, so it includes regulations on economic activity but not regulations on social or other activity. Construction of the index is described in Gwartney et al. (2014).
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The authors gratefully acknowledge the helpful comments from Russell Sobel, two referees, and the journal’s editor.
See Table 3.
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Holcombe, R.G., Boudreaux, C.J. Regulation and corruption. Public Choice 164, 75–85 (2015). https://doi.org/10.1007/s11127-015-0263-x
- Size of government