GEP Research Paper 08/15
Corruption and Trade in General Equilibrium
Sugata Marjit and Biswajit Mandal
Summary
We prove that greater corruption in labor-abundant countries will restrict the volume of world trade but they still may gain, while corrupt capital-abundant countries will promote trade and be worse off with increasing degree of corruption.
Abstract
We use the HOSV model of trade to find out a link between corruption and the pattern of trade, not just its effect on the volume of trade. We prove that greater corruption in labor-abundant countries will restrict the volume of world trade while corrupt capital-abundant countries promote trade. This is caused by intermediaries who are engaged in mitigating the transaction cost of corruption. Relatively corrupt economy will export capital-intensive goods. However, relatively capital-abundant country will be worse off with increasing degree of corruption at home and abroad, whereas the labor-abundant country may gain from further corruption.
Issued in April 2008
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