Public goods and corruption in the Ramsey model

This paper discusses the effect upon economic growth of corruption in the neo-classical framework. Corruption is defined as follows: The government purchases a portion of the private output and then uses this purchase to provide free public services to private producers, but the marginal productivity of these free public services is zero. It is shown that the introduction of public goods and taxation do not alter the stability properties of the model. The study examines how corruption and taxation affect the rate of economic growth and the possibilities of stabilization policy. Firms and households are divided into two sectors.