We consider a principal-agent model to examine the conditions under which corruption prompts investment. We also investigate three policies that can be used to combat corruption: strengthening monitoring, increasing compensation, and enhancing accountability. Our theory suggests that increasing monitoring intensity mitigates corruption at the cost of reduced investment. The most cost- effective policy to control corruption is to enhance accountability, which reduces corruption without decreasing growth-enhancing investment. We test our theo- retical predictions using Chinese infrastructure investment and corruption data. The data show that infrastructure investment is negatively correlated with anti- corruption effort, as predicted by the theoretical model.
- Infrastructure development
- Investment incentive