Governance, productivity and economic development

2025-07-17

AI Summary

This paper examines the interplay among corruption, tax-based redistribution, and innovation-driven policies in shaping economic development. We develop a political economy general equilibrium model featuring heterogeneous agents and an active government, incorporating an analytically tractable two-private-agent structure. Introducing the novel concept of “political-economic equilibrium,” we identify a key transmission channel: corruption erodes the tax base, thereby reducing the efficiency of public investment. We prove the existence of this equilibrium and conduct quantitative analysis showing that curbing corruption significantly enhances public investment efficiency. Moreover, under weak governance, innovation incentives—relative to redistribution alone—yield substantially higher long-run growth. Our framework provides a new analytical lens and empirical grounding for understanding how institutional quality and strategic policy design jointly determine developmental outcomes.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Other Foundations of Reasoning under Uncertainty

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Security and Privacy: Privacy-enhancing technologies
• Social Networks and Social Media: Media and governance, opinion dynamics, filter bubbles, polarization

Abstract

This paper explores the interplay between transfer policies, R&D, corruption, and economic development using a general equilibrium model with heterogeneous agents and a government. The government collects taxes, redistributes fiscal revenues, and undertakes public investment (in R&D, infrastructure, etc.). Corruption is modeled as a fraction of tax revenues that is siphoned off and removed from the economy. We first establish the existence of a political-economic equilibrium. Then, using an analytically tractable framework with two private agents, we examine the effects of corruption and evaluate the impact of various policies, including redistribution and innovation-led strategies.

Problem

• Examining corruption's impact on economic development
• Analyzing redistribution and innovation-led policy effects
• Modeling governance in tax and R&D investment

Innovation

• General equilibrium model with heterogeneous agents
• Corruption modeled as tax revenue leakage
• Evaluates redistribution and innovation-led policies