Government and Corruption: Scylla and Charybdis

Using public sector employment and corruption perception data for 72 countries across the world, this article demonstrates that despite common notion countries with "smaller" governments do not tend to have lower corruption. Under general assumptions, one can demonstrate that there is an optimal size of public sector employment corresponding to the highest capital intensity. The model has several implications: lower optimal sizes of governments for labor intensive countries and higher sizes for capital intensive ones, possibility to reduce corruption paying a cost of suboptimal output, and a higher "price" of an oversized government for labor intensive countries.