Corruption, credit market imperfections, and economic development

This paper studies the role of credit market imperfections and corruption on the process of economic development. We address the question of how much of the differences in output per worker across countries can be attributed to differences in credit market policies and corruption. In order to accomplish that, we construct and solve numerically a computable general equilibrium model with heterogeneous agents, contractual imperfections and occupational choices. The quantitative exercises suggest that a country in which debt contracts are not enforced and corruption corresponds to 10% of business income will be roughly 1/3 to 1/2 as rich as the United States. Though this is an important effect, it is a small fraction of the huge dierences in income per capita across countries.