Institutional quality and

endogenous economic growth

Vladimir Kuhl Teles
Getulio Vargas Foundation, Sao Paulo School of Economics, Sao Paulo, Brazil
Abstract
Purpose This paper seeks to investigate the relation among corruption, institutional quality and
economic growth.
Design/methodology/approach It expands the Erlich and Lui (JPE) endogenous growth model.
From this model, institutional aspects such as judicial corruption, bureaucracy, democracy and income
inequality are introduced into the analysis in order to identify the institutional conditions that may
inhibit corruption and stimulate economic growth.
Findings It was demonstrated that the magnitude of the marginal effect of bureaucratic corruption
on growth crucially depends on other institutional aspects of the economy and that judicial corruption
amplies the perverse effects of bureaucratic corruption.
Originality/value The paper explains why some countries with a lot of corruption grow at high
rates. In that sense if a country has only a lot of judicial or bureaucratic corruption it may grow at high
rates but, when these two kinds of corruptions occur at the same time, then the economy will be at a
low-growth pitfall.
Keywords Corruption, Economic growth, Quality
Paper type Research paper
1. Introduction
Corruption and economic growth are intimately related. In this sense, the economic
literature on economic growth has indicated the existence of an inverse relation
between corruption and long-term growth. In spite of the fact that all countries do
present some incidence of corruption, the levels of corruption vary sharply between
countries. Also, several signicant empirical studies (Mauro, 1995; Rodrick et al., 2004;
Glaeser et al., 2004) have indicated that those countries with greater incidence of
corruption and bad institutions tend to have persistently lower levels of growth.
Although this relation has become increasingly consolidated in theory, several
aspects have nevertheless remained enigmatic in the economic literature, namely: is it
possible that countries with high-quality institutions also have high levels of
corruption? If this is possible, in which cases does this occur? Why is it that countries
with high levels of corruption have high growth, while others do not? What is the
relation between judicial corruption and economic growth? Does democracy impede
corruption? Does bureaucratic quality avoid corruption? Does unequal interpersonal
income distribution generate corruption?
In this paper, we attempt to offer formal answers to these questions by presenting a
theoretical model that relates bureaucratic corruption to economic growth where
agents have a choice of two assets in which to invest: human capital and political
capital. Political capital determines the income obtained from bureaucratic corruption,
which has no direct effect upon production, for the income produced would only have a
redistributive effect, while human capital would lead to an increase in long-term
production, such as Lucas (1988), Hansen and Knowles (1998) and Creedy and Gemmel
The current issue and full text archive of this journal is available at
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Endogenous
economic growth
29
Journal of Economic Studies
Vol. 34 No. 1, 2007
pp. 29-41
qEmerald Group Publishing Limited
0144-3585
DOI 10.1108/01443580710717200
(2005). Bureaucratic corruption then becomes detrimental to growth, for part of the
economys productive capacity would be directed towards unproductive ends.
The model proposed here is an expansion of the Ehrlich and Lui (1999) model, in
which the legislative rules restraining corruption are not ignored, possibly leading to
judicial corruption. In the original model there is no possibility of deterrence of corrupt
agents. The present model inserts this chance and the alternative of corrupt agents
getting away of punishment using their political capital via judicial corruption.
The model is repeated for two alternative cases: one in which the agents have the
same initial endowment of political capital, and the other in which the agents are
divided into two heterogeneous groups bureaucrats and workers who have
distinct initial endowments and accumulation possibilities of political capital. Thus,
this study is organized as follows: the following section presents a simple corruption
and growth model in which the agents are homogeneous. Section 3 presents the
heterogeneous case. The last section presents the nal comments.
2. The model with homogeneous agents
The economys only productive asset is human capital, which is generated through a
function similar to the one proposed by Lucas (1988), whose only difference is the
insertion of depreciation of human capital, given by:
_
H Hfh 2d
h
1
where
_
H is the growth rate of human capital, H is the current stock of human capital, f
is a parameter indicating the productivity of the hours spent accumulating human
capital, h are the hours spent accumulating human capital in the current period, and d
h
is depreciation rate of human capital; in other words, the human capital accumulation
activity is intensive in human capital, not depending on any other factor. Parallel to
this, the political capital movement equation follows a specication similar to the
human capital movement equation, given by:
_
Q Qwq 2d
q
2
where
_
Q is the growth rate of political capital, Q is the current stock of political capital,
f is a parameter indicating the productivity of the hours spent accumulating political
capital, q are the hours spent accumulating political capital in the current period, and
d
q
is the depreciation rate of political capital. The production function is thus given by:
Y H 1 2h 2q 3
where 1 2h 2q is the number of hours spent on current production. Lastly, the
returns from corruption activities for the agent are reected in the following
consumption function:
c Y 1 u ln
Q
Q
*
_ _
4
where Q
*
is the per-capita political capital stock, and u is a measurement of the
economys size of the bureaucracy. Thus, if Q . Q
*
, we have that c . Y, meaning
that if an agent has more political capital than the average level of political capital of
the agents, the agent then receives additional consumption over and above that
JES
34,1
30
guaranteed by his or her production. At the same time, if Q , Q
*
, we have that c , Y,
meaning that if an agent has less political capital than the average level of political
capital of the agents, the agent loses income, thus having a lower level of consumption.
It then becomes clear that income obtained from corruption is acquired from the
transfer of income from other agents, and not from some productive activity.
At this point it is not difcult to see that since all the agents have the same initial
endowments and have the same utility function, meaning that each agent will face the
same maximizing problem, all agents will accumulate the same quantity of political
capital, thus the quantity of political capital for each agent will be equal to the
per-capita quantity of political capital, meaning that at equilibrium Q
i
Q
*
, for each
agent i. Thus, we have the equilibrium condition of the problem Q Q
*
.
Lastly, the agents maximization problem is now given by the maximization of the
expected utility, in which consumption, given by equation (4), and the product, given
by equation (3), are substituted in the utility function, and the problem is then subject
to restrictions (1) and (2), and to the transversality conditions, so that the agent solves
the following maximization problem:
max
_
1
0
pQ
H1 2h 2q 1 u ln
Q
Q
*
_ _ _ _
12s
21
1 2s
_

_
_

_
1 2pQ
z
12s
21
1 2s
_ _
_

_
_

_
e
2rt
dt
s:t:
_
H Hfh 2d
h

_
Q Qwq 2d
q

and
t!1
liml
Q
0;
t!1
liml
H
0
5
where 0 , pQ , 1 is the probability of the agent not being caught while engaged in
corruption, and r . 0 is the discount rate. At the same time, z will be the agents
consumption if caught. The model without risk described by Ehrlich and Lui (1999) is
similar to the model above when pQ 1, ;Q In this way, the insertion of the
probability of the agent being caught, and its relation with political capital, will not
change the main results of Ehrlich and Lui (1999), but it will provide us with a possibility
to examine the relation between bureaucratic corruption and other institutional
conditions such as judicial corruption and democracy. It is also assumed that the
objective function maximized by agent is concave. Therefore, we have a simple optimal
control problem with two state variables, H and Q, and two control variables, h and q.
Solving the problem and using the equilibrium condition we will have in the steady
state:
pQ{H1 2h 2q}
2s
l
H
f 6
pQ{H1 2h 2q}
2s

l
Q
Qw
H
7
_
l
H
rl
H
2{H1 2h 2q}
2s
pQ1 2h 2q 2l
H
fh 2d
h
8
Endogenous
economic growth
31
_
l
Q
rl
Q
2p
0
Q
H1 2h 2q
_
12s
21
1 2s
_ _
2pQH1 2h 2q
2s

H1 2h 2qu
Q
_ _
p
0
Q
z
12s
21
1 2s
_ _
2l
Q
wq 2d
q
9
where l
H
and l
Q
are the co-state variables. By solving the system (6)-(9) and using the
transversality conditions, we can obtain the optimal choice of h and q which is given by:
h
wq 2d
q
1 f1 2q 2r s 21d
h
sf
10
q
1 2sfh 2d
h
21d
q
2r
1
12s
u
_ _
w1 2h
_
1
12s
u
_ _
21w
_ 11
where 1 Qp
0
Q=pQ is the elasticity of risk in relation to the quantity of political
capital.
It thus becomes clear that the agents are not concerned with risk itself, but with the
political capital-risk elasticity, meaning that in an economy it is possible that there
would be a greater risk of a corrupt agent being caught, and nevertheless be high rates
of corruption.
We can think of judicial corruption as political capital being used to corrupt the
judicial system. If there is no judicial corruption, the probability of the corrupt agent
being caught rise with the accumulation of political capital, because the agent will
spent more time in bureaucratic corruption activities. But if there is judicial corruption,
the probability of a corrupt person being arrested may diminish because the political
capital could be used to corrupt the judicial system. Thus, the signal and the
magnitude of the elasticity of p in relation to the quantity of political capital, 1, that
measures the effect of political capital on probability of agent not being caught may be
seen as a good proxy of judicial corruption, as stated in denition 2. From equations
(10) and (11), it is possible to observe several agent behavior rules, described in
propositions 1-6.
Proposition 1. The variation in the number of hours spent on the accumulation of
human capital shall be given by 1w 2f=sfDq, where Dq is the variation in the
number of hours spent on the accumulation of political capital.
Proof. To verify this, we simply differentiate equation (14) in relation to q, which
leads us to:
h
q

1w 2f
sf
which is negative when 1 , f=w: A
Proposition 2. Given 1 , f=w, an increase in the number of hours dedicated to
the accumulation of political capital implies a reduction in the number of hours
dedicated to the accumulation of human capital.
Proof. Given by Proposition 1. A
JES
34,1
32
Denition 1. We dene F 1w 2f=sf as the marginal effect of a variation in
political capital on human capital, where h=q 1w 2f=sf:
Denition 2. We dene judicial corruption as the elasticity of risk in relation to the
quantity of political capital, 1, in which the greater 1 is, the greater the judicial
corruption will be.
Proposition 3. Judicial corruption has a positive effect upon the marginal effect of a
variation in political capital on human capital.
Proof. Given by Denition 1. A
Proposition 4. An increase in judicial corruption leads to an increase in the number
of hours dedicated to the accumulation of political capital, if us 21 . 1, and if
0 , s , 1:
Proof. See Appendix 1. A
Proposition 5. An increase in judicial corruption leads to a reduction in the number
of hours dedicated to the accumulation of human capital, if q
1
. wq 2d
q
=f 2w1:
As a result, economic growth diminishes.
Proof. See Appendix 2. A
Proposition 6. An increase in the size of the economys bureaucracy leads to an
increase in the number of hours dedicated to the accumulation of political capital, and
therefore, corruption, if 21 # F # 0, and h . w 2q=w: As a result, economic
growth diminishes.
Proof. See Appendix 3. A
Proposition 1 explains the existence of high rates of corruption in certain countries,
that, even so, have sustainable levels of economic growth, which is the case of Japan,
for example, whose risk aversion coefcient is particularly high. It then becomes clear
that when two countries have the same corruption rates, but whose economies grow at
different rates, this does not mean that corruption is not correlated with growth,
meaning only that agents are less willing to sacrice their rate of savings to engage in
corruption. In this same context, proposition 3 shows us that bureaucratic corruption
has a greater marginal effect upon the accumulation of human capital in countries with
judicial corruption. Once again, the example of Japan becomes necessary, since reduced
judicial corruption in said country implies a reduced effect of bureaucratic corruption
upon growth.
Regarding judicial corruption, propositions 4 and 5 infer that this type of
corruption implies a crucial institutional issue in the forming of economic growth
traps that increase bureaucratic corruption and decrease the accumulation of
human capital.
Lastly, proposition 6 raises a fundamental issue for the drawing up of development
policies: Since, an increase in the size of the economys bureaucracy implies an adverse
effect on economic growth, up to what point would it be correct to afrm that increased
state involvement in poorer economies would be necessary to stimulate
development[1]?
3. The model with heterogeneous agents
In order to expand our analysis regarding the factors causing different growth rates in
different economies, we shall now consider that agents have different initial
endowments, as well as distinct political capital accumulation possibilities. Such a
distinction seeks to approximate the model to reality, since an intrinsic characteristic of
Endogenous
economic growth
33
underdeveloped economies is the divergence of political capital among the different
social classes.
In this sense, this model shall consider agents as being members of two classes. The
rst class comprises bureaucrats, and the second, workers, who have an initial
endowment of political capital inferior to that of bureaucrats, and are subject to the
restriction that they cannot accumulate political capital at a rate higher than that of
bureaucrats, in order to prevent a complete convergence of stocks of political capital
between bureaucrats and workers.
The equations that present the agents maximization problem are similar to those
found in the homogeneous agent model, with the exception that the underwritten w is
now included for the variables referring to the workers, and the underwritten b is
included for those variables referring to bureaucrats, besides the alteration in the
worker and bureaucrat consumption functions, that follow Ehrlich and Lui (1999) and
are now, respectively, given by:
c
w
1 2u 1 2
Q
w
Q
b
_ _ _ _
Y
w
12
c
b
1 ln
Q
b
Q
*
b
_ _ _ _
Y
b

N
w
N
b
u 1 2
Q
w
Q
b
_ _
Y
w
_ _
13
where Q
b
is per capita political capital stock for bureaucrats, N
w
is the number of
workers, and N
b
is the number of bureaucrats. By admitting that the growth rates for
the number of workers and for the number of bureaucrats are equal to zero, we have
that the ratio N
w
/N
b
is a constant. It may also be observed that the greater the N
w
/N
b
ratio, the greater the consumption of bureaucrats, since the quantity of bribes per
bureaucrat increases. On the other hand, the greater Q
w
/Q
b
is, the lower the disparity
will be between the political capital stocks of workers and bureaucrats, so that
bureaucrat consumption will be lower.
At the same time, we have that the relation Q
b
Q
*
b
is an equilibrium condition for
the model. Regarding the relation between the accumulation of political capital stocks
by workers and bureaucrats, it must be pointed out that there is no restriction for
bureaucrats since they choose an optimal allocation. On the other hand, workers face
restrictions, and are also confronted by a different risk function, in which the political
capital-risk elasticity for workers, 1
w
, is less than the political capital-risk elasticity for
bureaucrats, 1
b
.
Therefore, assuming that workers equate the expected marginal returns for both
types of capital, it is possible to afrm that they will have optimal allocation
possibilities, whose choice will depend on the difference between their political
capital-risk elasticity and that of the bureaucrats. Initially, we shall consider that both
elasticities are quite close. In this sense, workers shall choose the same allocation as the
bureaucrats, since it is the allocation that generates the greater expected marginal
return, so that q
w
q
b
,
_
Q
w
=Q
w

_
Q
b
=Q
b
, h
w
h
b
, e
_
H
w
=H
w

_
H
b
=H
b
, which
implies that H
w
H
b
, since the initial endowments of human capital for both classes
is equal.
The other possibility comes from the great difference in the political capital-risk
elasticities of bureaucrats and workers. In this scenario, workers would accumulate
JES
34,1
34
political capital at a lower rate than that of bureaucrats. As a result of this allocation,
the expected marginal return of political capital for workers diminishes over time, and
they would substitute their allocation of political capital for human capital, to the point
where political the capital accumulation rate becomes null, and workers would then
specialize in accumulating human capital. In this type of allocation, we have that
_
Q
w
=Q
w
0, and q
w
0. Thus, in both cases, we have that the Q
w
/Q
b
ratio is a
constant. Thus, we can consider that workers will follow the bureaucrats decision in
order to maintain the relation Q
w
=Q
b
constant, and avoid the convergence of their
consumption to lowest level.
The basic idea behind said consumption functions is that workers are not concerned
with other workers, but only with bureaucrats, while bureaucrats seek to maximize
their consumption given the stock of political capital of other bureaucrats, as well as
that of workers. Thus, by solving the maximization problem of bureaucrats we have
reached the provision of the quantity of hours dedicated to the accumulation of human
and political capital which is given by:
h
b

d
h
s 21 1
b
wq
b
2d
q
f1 2q
b
2r
sf
14
q
b

r2
1
b
w
12s
w
_ _
1
N
w
N
b
u
_ _

1
b
w
12s
2w
_ _
N
w
N
b
Q
w
Q
b
_ _
12h
b
1
b
d
q
212sfh
b
2d
q

1
b
w2
1
b
w
12s
w
_ _
1
N
w
N
b
u
_ _

1
b
w
12s
2w
_ _
N
w
N
b
Q
w
Q
b
_ _
15
From equations (14) and (15), several results regarding the relation between
institutional quality and growth may be obtained, especially with regard to the
relations between democracy and income distribution with growth. In this sense, the
denitions for democracy and income distribution for the purposes of this study are as
follows:
Denition 3. Let 0 # Q
w
=Q
b
# 1 be the relation between the political capital of
workers and bureaucrats, thus, the closer to 1 the ratio is, the better the economys
interpersonal income distribution.
Denition 4. Let 0 # 1
w
=1
b
# 1 be the relation between the political capital-risk
elasticities of workers and bureaucrats, thus, the closer to 1 the relation is, the more
democratic the economy.
It must be pointed out that the denition of democracy established here is not
directly related with social choice function presented in the economy. This is because
the more correct denition of democracy is not given by the existence of a system of
majority elections, but by the nature of economic laws as representing the choice of all,
and that all are coerced by the law in the same manner.
Therefore, from equations (14) and (15), and according to the denitions of income
inequality and democracy, we reach the results outlined in propositions 7 and 8.
Proposition 7. An increase in interpersonal income inequality generates an
increase in corruption, and thus, a reduction in economic growth, if workers follow the
investment allocation of bureaucrats.
Proof. See Appendix 4 A
Endogenous
economic growth
35
Proposition 8. A transition to a less democratic regime generates an increase in
corruption, and thus, a reduction in economic growth, if workers follow the investment
allocation of bureaucrats.
Proof. See Appendix 5 A
The result outlined in proposition 7 offers us an additional relation other than those
offered by the economic literature for income inequality and the accumulation of
human capital, and thus, economic growth. From this perspective, the causality
relation in which poor income distribution implicates lower accumulation of human
capital corroborates the Alesina and Rodrik (1994) proposal, according to which poor
income distribution leads to a reduction in the accumulation of physical and/or human
capital, and thus, economic growth[2]. On the other hand, the economic literature
usually proposes that a low level of human capital accumulation implies poor income
distribution. Therefore, the existence of a bilateral relation between human capital
accumulation and income inequality is possible, thus leading to the formation of
vicious (or virtuous) circles between institutional quality and economic growth, as
foreseen by Alesina et al. (1996).
Regarding democracy, there seems to be no consensus in the economic literature. In
this sense, Barro (1996), for example, found a weakly negative relation between
democracy and economic growth. At the same time, in a later study, Barro1998 infers
that the relation between democracy and growth is non-linear, being positive for lower
levels of democracy, and more adverse for more advanced levels of democracy. Using
an alternative approach, Rodrick (2000) has demonstrated that democracy must be the
goal in generating sound institutions, and consequently, economic growth. Therefore,
we have attempted in this study to suggest a new approach to the transition
mechanism between democracy and growth: more democratic regimes imply lower
rates of corruption, and thus, higher rates of growth. So, any disassociation of
institutional factors, such as democracy and income inequality, from economic growth
should be considered a form of theoretical shortsightedness in explaining the
differences in economic growth among countries.
4. Concluding remarks
This paper presents an analysis of the relation among corruption, institutional quality
and economic growth. This analysis is made from a growth model in which agents
may choose between two assets, one productive and without risk, human capital, and
another, non-productive and risky, political capital, the latter supplying income from
corruption. Thus, as more political capital is accumulated, less human capital is
accumulated, limiting the economys capacity for growth.
From this model, institutional aspects such as judicial corruption, bureaucracy,
democracy and interpersonal income inequality are introduced in the analysis in order
to identify the institutional conditions that stimulate the accumulation of political
capital, and thus identify those institutional policies that may inhibit corruption and
stimulate economic growth.
This study anticipates potential obstacles in promoting economic growth in
economies whose institutions are anti-democratic, that are permeated by bureaucracy
and judicial corruption, and in which there are sharp income disparities among agents.
In this sense, the paper attempts to suggest that institutional quality is what originally
JES
34,1
36
separates countries with high levels of economic growth from those still burdened by
economic growth traps.
Finally, it was demonstrated that the magnitude of marginal effect of corruption on
growth crucially depends of other institutional aspects of the economy and that judicial
corruption amplify the perverse effects of bureaucratic corruption. In that sense if a
country have only a lot of judicial or bureaucratic corruption it may growth at high
rates, but when these two kinds of corruptions occur at same time, then the economy
will be at a low-growth pitfall.
Notes
1. A good discussion about this theme is Reinert (1999).
2. A similar result is reached by Aiginger (2005) and Zagler (2005).
References
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the 1990s, Journal of Economic Studies, Vol. 32 No. 6.
Alesina, A. and Rodrik, B. (1994), Distributive politics and economic growth, Quarterly Journal
of Economics, pp. 465-90.
Alesina, A. et al., (1996), Political instability and economic growth, Journal of Economic
Growth, Vol. 1, pp. 189-211.
Barro, R. (1996), Democracy and growth, Journal of Economic Growth, Vol. 1, pp. 1-27.
Barro, R. (1998), Determinants of Economic Growth: ACross-country Empirical Study, MIT Press,
Cambridge, MA, August 1996.
Creedy, J. and Gemmell, N. (2005), Publicly nanced education in an endogenous growth model,
Journal of Economic Studies, Vol. 32 No. 2.
Ehrlich, I. and Lui, F. (1999), Bureaucratic corruption and endogenous economic growth, The
Journal of Political Economy, Vol. 107 No. 6, pp. S270-93.
Glaeser, E., La Porta, R., Lopez-De-Silanes, F. and Shleifer, A. (2004), Do institutions cause
growth?, Journal of Economic Growth, Vol. 9, pp. 271-303.
Hansen, P. and Knowles, S. (1998), Human capital and returns to scale, Journal of Economic
Studies, Vol. 25 No. 2.
Lucas, R. (1988), On the mechanics of economic development, Journal of Monetary Economics,
Vol. 22 No. 1, pp. 3-42.
Mauro, P. (1995), Corruption and growth, Quarterly Journal of Economics, Vol. 110 No. 3,
pp. 681-712.
Reinert, E. (1999), The role of the state in economic growth, Journal of Economic Studies, Vol. 26
Nos 4/5.
Rodrick, D. (2000), Institutions for high-quality growth: what they are and how to acquire them,
NBER Working Paper No. 7540.
Rodrick, D., Subramanian, A. and Trebbi, F. (2004), Institutions rule: the primacy of institutions
over geography and integration in economic development, Journal of Economic Growth,
Vol. 2 No. 9, pp. 131-65.
Zagler, M. (2005), Wage pacts and economic growth, Journal of Economic Studies, Vol. 32 No. 5.
Endogenous
economic growth
37
Further reading
Becker, G. (1968), Crime and punishment: an economic approach, The Journal of Political
Economy, Vol. 76 No. 2, pp. 169-217.
Easterly, W. (1999), Life during growth, Journal of Economic Growth, Vol. 4 No. 3, pp. 239-75.
Appendix 1
Proof of proposition 4. Substituting equation (10) in equation (11), and rearranging the terms,
we arrive at:
q
1 2sf2
1
12s
u
_ _
w
_
f2d
q
12rs21d
h
sf
_ _
s21d
h
21d
q
2r
1
12s
u
_ _
w
_ _ _
1
12s
u 21w
_
s21f
1
12s
u
_ _
w
_
w12f
sf
_ _ A1
that supplies the number of hours dedicated to the accumulation of political capital by the agents
resulting from exogenous constants only.
The differential of q in relation to u, according to equation (A1), is given by:
q
1

a
1
b 2ab
1
b
2
where:
a 1 2sf 2
1
1 2s
u
_ _
w
_ _
f 2d
q
1 2r s 21d
h
sf
_ _
s 21d
h
21d
q
2r
1
1 2s
u
_ _
w
_ _ _ _
b
1
1 2s
u 21w
_ _
s 21f
1
1 2s
u
_ _
w
_ _
w1 2f
sf
_ _
a
1
2
w
1 2s
f 2d
q
1 2r s 21d
h
sf
_ _
2
d
q
sf
X
1
1 2s
2d
q
b
1

1
1 2s
2w
w
1 2s
w1 2f
sf
_ _
2
w
sf
X
where:
X 1 2sf 2
1
1 2s
u
_ _
w
_ _
It thus becomes clear that an increase in judicial corruption leads to an increase in the number of
hours dedicated to the accumulation of political capital, if a
1
b . b
1
a, or, in the same manner, if
a
1
. b
1
q: We also know from equation (10), that the following equality is veried:
f 2d
q
1 2r s 21d
h
sf
h 2Fq
Therefore, by applying denition 1, and the above equality, we have that an increase in judicial
corruption leads to an increase in the number of hours dedicated to the accumulation of political
capital if:
JES
34,1
38
2
w
1 2s
h 2Fq 2
d
q
sf
X
1
1 2s
2d
q
.
1
1 2s
2w
w
1 2s
F2
w
sf
X
_ _
q
that, when the terms are rearranged, leads to:
1
1 2s
1 2q wq 2d
q
1
X
sf
_ _
.
w
1 2s
h
That may always be veried when us 21 . 1, and if 0 , s , 1: A
Appendix 2
Proof of proposition 5. An increase in judicial corruption leads to a reduction in the number of
hours dedicated to the accumulation of human capital if:
h
1

wq w1q
1
2fq
1
2d
q
sf
, 0
that occurs when q
1
. wq 2d
q
=f 2w1: A
Appendix 3
Proof of proposition 6. Substituting equation (10) in equation (11), and rearranging the terms,
we arrive at:
q
1 2sf2
1
12s
u
_ _
w
_
f2d
q
12rs21d
h
sf
_ _
s21d
h
21d
q
2r
1
12s
u
_ _
w
_ _ _
1
12s
u 21w
_
s21f
1
12s
u
_ _
w
_
w12f
sf
_ _ C1
which supplies us with the number of hours dedicated to the accumulation of political capital by
the agents resulting from exogenous constants only.
The differential of q in relation to u according to equation (C1) is given by:
q
u

a
u
b 2ab
u
b
2
where:
a 1 2sf 2
1
1 2s
u
_ _
w
_ _
f 2d
q
1 2r s 21d
h
sf
_ _
s 21d
h
21d
q
2r
1
1 2s
u
_ _
w
_ _ _ _
b
1
1 2s
u 21w
_ _
s 21f
1
1 2s
u
_ _
w
_ _
w1 2f
sf
_ _
a
u

a
u
w 1 2
f 2d
q
1 2r s 21d
h
sf
_ _
b
u

b
u
1 w
w1 2f
sf
_ _
Thus, we have that q=u . 0 if a
u
b . ab
u
, or in a similar manner, if a
u
=b
u
. q.
In this sense, it must be pointed out that since q , 1, if a
u
. b
u
occurs, the proposition
Endogenous
economic growth
39
is then proven. In order to verify this, we may introduce some algebraic manipulations, as
follows.
In this sense, according to equation (10), we have that the following equality is veried:
f 2d
q
1 2r s 21d
h
sf
h 2Fq
Then, a
u
becomes:
a
u
w1 2h Fq . 0
At the same time, we have that:
b
u
1 Fw . 0
Lastly, we need to observe only if a
u
. b
u
occurs. Thus, this occurs if:
w1 2h Fq . 1 Fw
Which, when the terms are rearranged, leads to:
h .
Fq 2Fw 21
w
Thus, in order to verify whether this is true or not, we shall examine the extreme cases of F.
Therefore, if F 21, we have that above inequality becomes:
h .
w 2q
w
which, by hypothesis, is true.
Lastly, analyzing the other extreme case, where F 0, the inequality then becomes:
h .
w 21
w
which is always true, sincew 21 , 0, while h . 0. It thus becomes clear that q=u . 0: A
Appendix 4
Proof of proposition 7. Since, the workers follow the investment allocation of bureaucrats, the
variation in the number of hours dedicated to the accumulation of political capital follows the
allocation of bureaucrats. Thus, in order to analyze said variation, we substitute equation (14) in
equation (15), and obtain:
q
b

r 2A1 2B 1
b
d
q
1 2sd
q
2fB
1
b
w 2A1 F 1 2sfF
D1
where:
A
1
b
w
1 2s
w
_ _
1
N
w
N
b
u
_ _

1
b
w
1 2s
2w
_ _
N
w
N
b
Q
w
Q
b
_ _
B
d
h
s 21 21
b
d
q
f 2r
sf
JES
34,1
40
Thus, the effect of a variation in the distribution of income upon the number of hours dedicated
to the accumulation of political capital is given by the differentiation of equation (D1) in relation
to Q
w
=Q
b
, as follows:
q
b
Q
w
=Q
b

q
b
A
A
Q
w
=Q
b

However, we have that:

A
Q
w
=Q
b

N
w
N
b
1
b
w
1 2s
2w
_ _
. 0
So, we now only need to obtain the sign of q
b
=A: Said differential is given by:
q
b
A

21 2BX 221 FZ
X
2
when:
Z r 2A1 2B 1
b
d
q
1 2sd
q
2fB
X 1
b
w 2A1 F 1 2sfF
Thus, since {X; Z} .. 0, we have that q
b
=A , 0 if 1 FZ , 1 2BX, which is true,
since:
Z
X
,
1 2B
1 F
where, since Z=X q
b
, and B h
b
2Fq
b
, we have that:
q
b
, 1 2h
b
which is always true, since 1 2h
b
q
b
u
b
, where u
b
is the number of hours dedicated to work
by the bureaucrats. Thus, q
b
=Q
w
=Q
b
, 0, which means that an increase in income inequality
would lead to an increase in the number of hours dedicated to the accumulation of political
capital, and consequently, in a reduction in economic growth. A
Appendix 5
Proof of proposition 8. The development of democracy, meaning an approximation of
1
b
=1
w
to 1, leads to a reduction in income inequality, which, according to proposition 7, leads
to a reduction in the accumulation of political capital, and thus, an increase in economic
growth. A
Corresponding author
Vladimir Kuhl Teles can be contacted at: vkteles@fgvsp.br
Endogenous
economic growth
41
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