A Human Capital Based Growth Model with Environment and Corruption

Abstract

In this paper, we present a simple overlapping-generations model with human capital, pollution, and political corruption to consider problems related to sustainable growth. In many growth models that incorporate the environment, it is assumed that there exists an altruistic government that enforces the environmental policy to maximize the utility of households or social welfare. The conditions for sustainable growth are derived based on this assumption. However, the assumption that the government implements appropriate policies might be overly optimistic. Bribes, political donations, and corruption might taint and skew government policy. This paper also considers politico-economic problems. We assume that environmental policy is determined endogenously through a process of bargaining between the government and the firm (or interest group). Corruption relaxes environmental standards, lowers the long-run growth rate, and might cause economic stagnation. The long-run growth rate might become negative if the economy is rife with corruption. JEL Classification: O44, P48, Q20.