Economic Freedom and Corruption: New Cross-country Panel Data Evidence
Abstract: This paper examines the empirical relationship between economic freedom and corruption. We use a principal-agent-client model to identify the potential causal linkages between corruption and the components of economic freedom. We then estimate a two-equation system where freedom depends upon corruption and vice versa. Using a series of panel GMM estimators, we find that corruption lowers economic freedom, but that freedom does not significantly impact corruption. The result that corruption lowers freedom supports the “grabbing hand” theory of corruption, where a non-benevolent government creates inefficient regulation and barriers of entry barriers to generate economic rents.