Erosion of State Power, Corruption Control, and Political Stability

Abstract: How do corruption and the state apparatus interact, and how are they connected to the political and economic dimensions of state capacity? Motivated by historians' analysis of powerful empires, we build a model that emphasizes the corrosive effect of corruption on state power. Under general assumptions about fat-tailed risk, we show that the optimal response for the head of the state apparatus is an endogenous lexicographic rule whereby local corruption is maintained at such a level that no erosion of state power is tolerated. We further investigate the conditions under which deviation from the lexicographic rule, over-tolerance of corruption, and erosion of state power become possible, showing a non-monotonic relationship in the correlation between state power and corruption across different levels of fiscal capacity. Our results are consistent with empirical patterns in recent cross-country panel-data.