Foreign Direct Investment, Corruption, and Institutional Reforms
Keywords:Corruption, Lobbying, Institutional reforms, Foreign direct investment
Corruption impacts the competitive conditions among firms and the flow of foreign investment. Institutional reforms made for fighting against corruption are sometimes useless. We develop a model in which a corrupted government tries to set an optimal institutional level taking into account the cost of this policy on foreign investment, the benefit of a corrupted domestic firm and the benefit of local citizens. A political contribution is made by a corrupted lobby group in order to benefit from a lower institutional level. Our results suggest that the optimal institutional level depends on the degree of efficiency of firms and the level of corruption of the host government.
Key words: Corruption, Lobbying, Institutional reforms, Foreign direct investment.
JEL: F21, F30, K42.