Abstract
Government officials may use their authority for private gain in designing and implementing public policies. This phenomenon—defined broadly as corruption (Tanzi, 1997a)—may result in enriching these officials as well as private individuals who obtain a larger share of public benefits or bear a lower share of public costs. In this way, corruption distorts the government’s role in resource allocation. It has been argued (Tanzi, 1995) that the benefits from corruption are likely to accrue to the better-connected individuals in society, who belong mostly to high-income groups. Thus, corruption would affect not only broad macroeconomic variables, such as investment and growth, as has been shown previously, but also income distribution. It has been further contended that corruption increases poverty by reducing the level of social services available to the poor, creating incentives for higher investment in capital-intensive projects and lower investment in labor-intensive projects (Rose-Ackerman, 1997a, 1999). Such a bias in investment strategy deprives the poor of income-generating opportunities.
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