Corruption is thought to prevent poor countries from catching-up.
We analyze one channel through which corruption hampers growth:
public investment can be distorted in favor of specific types of
spending for which rent-seeking is easier and better concealed. To
study this distortion, we propose an optimal growth model where
households vote for the composition of public spending subject to
an incentive constraint reflecting individuals' choice between
productive activity and rent-seeking. At equilibrium, the intensity
of corruption and the structure of public investment are determined
by the predatory technology and the distribution of political
power. Among different regimes, the model shows a possible scenario
of distortion without corruption in which there is no effective
corruption yet still the possibility of corruption distorts the
allocation of public investment, thus hampering growth. We test the
implications of the model on a panel of countries estimating a
system of equations with instrumental variables. We find that
countries with a high predatory technology invest more in housing
and physical capital in comparison with health and education. For
equal initial conditions, such countries grow slower and have
higher corruption, in particular when political power is
concentrated.