The interaction between corruption, bank cost efficiency and economic development in Italy

In this paper, we assess the interaction between corruption, bank cost efficiency, and economic development. Existing literature on the subject normally focuses separately on the link between corruption, financial development, and growth, and finds ambiguous results, not distinguishing between different types of credit institutions. We use Italian disaggregated data from 2004 to 2012, considering cooperative and non-cooperative banks, to determine whether controlling corruption affects banks’ cost efficiency in Italian provinces and promotes economic development. Utilizing a panel autoregressive model, we find that controlling corruption magnifies the positive impact of banks’ cost efficiency on economic development. Evidence of a positive effect of the interaction is observed, particularly in the case of non-cooperative banks and for higher values of the Control of Corruption Index.