Inayati Nuraini Dwiputri, Rimawan Pradiptyo, Lincolin Arsyad
The existence of the contradiction between the 'grease the wheel' hypothesis and the 'sand the wheel' hypothesis encouraged this study. Some studies that support the grease the wheel hypothesis stated that corruption can reduce inefficiency and facilitate the establishment of businesses that can increase capital and economic growth, especially in countries with weak governance systems. By developing Ramsey's economic growth theory, this study found that corruption actually worsened the economy, because of the inefficiency it caused. This study also employs more in-depth empirical analysis in Asian countries using the Ordinary Least Square (OLS) and Two Stage Least Square (TSLS) methods with an instrument variable. The results found that corruption can reduce the share of capital to the Gross Domestic Product (GDP) and also reduce the growth of capital, especially in countries that have weak institutional systems. Hence, this study supports the sand the wheel hypothesis and encourages the eradication of corruption. © 2019, Universita Putra Malaysia.
Faculty of Economics, Universitas Negeri Malang, Malang, Indonesia; Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia
