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Abstract

The problem of corruption plagues large numbers of developing nations. While factors related to the social fabric certainly play a role, it seems futile to ascribe corruption to particular cultures or racial groups. Rather it is important to understand the historical reasons and institutional factors that make some societies more corrupt than others. A central theme of this paper is that history matters. The main focus is on the interaction between individual incentives and collective reputation. In a corrupt (honest) society the general suspicion (trust) makes honesty a low (high-)-yield investment. Besides this potential for multiple equilibria with different levels of corruption, the paper also unveils some reasons for persistence of corruption. Because individuals may be locked in corruption by their past behavior, collective reputations tend to be long lasting; worse still, new generations suffer from the original sin of their elders long after the latter are gone. The paper thereby offers some explanation for why corruption tends to ratchet up but not down and for why it is difficult to root out corruption once it has taken hold. Finally, the paper reviews two alternative causes of the persistence of corruption.

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