CORRUPTION AROUND THE WORLD: EVIDENCE FROM A STRUCTURAL MODEL¤ by Axel Dreher, Christos Kotsogiannis and Steve McCorristony June 8, 2004 Abstract: The causes and consequences of corruption have attracted much attention in recent years by both academics and policy makers. Central in the discussion on the impact of corruption are perception-based indices. While informative, these indices are ordinal in nature and hence provide no indication of how much economic loss is attributed to corruption. Arguably, this shortcoming is rooted in the lack of a structural model. This is the issue addressed in this paper. By treating corruption as a latent variable that is directly related to its underlying causes, a cardinal index of corruption is derived for approximately 100 countries. This allows us to compute a measure of the losses due to corruption as a percentage of GDP per capita. Department of Economics, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, England, UK. yCorrespondence to: Steve McCorriston. Tel: ++44 (0)1392 263848; Fax: ++44 (0)1392 263242. Email:
[email protected] ¤Acknowledgements: We thank David de Meza and Gary Stasser for many insightful discussions. We also thank Johann Graf Lambsdorff, Michael Pickhardt, Jordi Sard`a and Michael Smart for comments. Research assistance was ably provided by Nils Herger. Kotsogiannis acknowledges financial support from the Economic and Social Research Council (ESRC award L219252102). All remaining errors are of course ours. 1 Introduction