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Why does Public Investment Fail to Raise Economic Growth? The Role of Corruption
Author(s) -
Haque M. Emranul,
Kneller Richard
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12068
Subject(s) - language change , investment (military) , economics , bureaucracy , public investment , procurement , quality (philosophy) , endogenous growth theory , public economics , monetary economics , market economy , public welfare , politics , law , art , literature , political science , philosophy , management , epistemology , human capital
In an endogenous growth model with information asymmetry between the government and the bureaucracy, the bureaucrats can falsely report of high‐quality high‐cost procurement, while providing low‐quality low‐cost product. This reduces the quality of public services, but inflates the public spending, which in effect reduces growth. We test our results by using three‐stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.