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Corruption and bilateral trade flows: extortion or evasion?

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This paper looks at the role of corruption as a barrier to imports, highlighting the interaction with nominal tariffs. It shows that the effect of corruption is non-linear and must take into account the level of nominal tariffs. In particular, we show that, while corruption taxes trade in an environment of low tariffs, it may create trade enhancing effects, when nominal tariffs are high. The trade enhancing effect dominates at low levels of corruption, suggesting that, at high tariffs, trade flows are an inverted-U shaped function of corruption. These predictions, including the inverted-U shape, are borne out in the data, in the framework of an augmented gravity model. The trade enhancing effect dominates for about 7% of the observations.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2007/2007-37.pdf

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Copyright INSEAD. All rights reserved