The author analyzes the real effects of corruption on a firm's production function. Using an augmented- Solow Growth model, with multifactor productivity as a function of corruption, a closed-form solution is derived for real GDP per capita, economic growth and physical capital per capita, at steady-state. With the a priori assumption of a negative relationship between corruption and multifactor productivity, it is shown that corruption negates a society's standard of living, economic growth and investment level. OLS results of the closed-form solutions not only support this theoretical finding for a full cross-section of countries, but they also reveal that corruption may have a positive concave effect on economic variables for the OECD sample. Nonlinear least squares estimates of the elasticities of physical and human capital, with the inclusion of the corruption index, confirm that the productivity of inputs is impacted. Using the Granger test on paneldata of corruption and national accounts for 58 countries, the author investigates causality.
