Fiscal capacity and multiple‐equilibria of corruption: Cross‐country evidence

We test the proposition that higher initial fiscal capacity of a nation strengthens law and order, and therefore, inhibit corruption, and in a multiple-equilibria setting, the economy will move towards the low-corruption stable equilibrium. We have found a significant relationship between more initial fiscal capacity and less corruption in a large cross-section of countries that became independent after World War II. Our findings also suggest that higher initial revenue capacity is a necessary condition but not a sufficient condition to reduce corruption. A government's willingness (benevolence) is also needed to combat corruption. Both of these variables help the economy to converge towards a ‘low-corruption stable equilibrium’. Copyright © 2010 John Wiley & Sons, Ltd.