Impact of institutions on the corruption-financial development nexus in Africa: non linearities and thresholds

Abstract

In this article, using a sample of African countries, we test the hypothesis of a non-linear effect of corruption on financial development in the presence of weak public institutions. We also determine the institutional quality threshold at which corruption 'greases' or 'sands' the wheels of financial development. We carry out this empirical study using the dynamic panel quadratic polynomial approach and the panel smooth transition regression (PSTR) approach. Three main results emerge. First, the relationship between corruption and financial development is non-linear and U-shaped. This relationship remains non-linear when the weak quality of public institutions is taken into account. Second, the effect of corruption on financial development depends on the quality of institutions. But the nature of the effect depends on the proxy for institutional quality used. Third, there is an institutional quality threshold at which the relationship between corruption and financial development becomes non-linear.