#07-11
Power, Compensation and Corruption:Theory and Evidence
Ajay Subramanian and Rajesh Chakrabarti
Abstract: Using a multi-period model of corruption in a heterogeneous soc iety, we show that societal corruption
and output crucially depend on the interplay among the productivity distribution, the societal
compensation structure, and the distribution of power. The power distribution influences the curvature of
the output-maximizing societal compensation structure in any period and the relation between societal
corruption and inequality. Societal corruption varies in a U-shaped manner with the bias of the power
distribution. Corruption attains its minimum in a society characterized by relatively higher levels of “petty” corruption compared with “high-level” corruption. Societies with differing power distributions
can experience dramatically divergent evolutions of their corruption levels and output. The positive
implications of our theory for the relations among corruption, compensation, power, inequality, and
growth are consistent with prior empirical evidence. Our theory also leads to the testable prediction that
societal corruption varies in a U-shaped manner with the relative level of public sector wages. We find
significant support for this prediction in our empirical analysis. From a policy standpoint, our results
suggest that high level corruption should be targeted by legal systems in developed economies while petty
corruption is relatively more pernicious in developing economies, and that highly productive economies
should have relatively powerful public sectors.
Keywords: D73, D81, D7
JEL classifications: Corruption, Power, Inequality, Compensation, Growth
