Asserting that corruption is one of the most serious challenges to modern economic systems and societies sounds commonplace at best: it lacks power to evoke interest because of overuse. The present chapter and the following four chapters provide evidence that corruption, accurately labeled the enemy within, causes serious systemic economic, institutional and social costs, and, when it hits financial markets, affects asset prices and financial supervision. In particular, the present chapter investigates the effects of corruption at the microeconomic level: the focus is on corruption as one of the most serious distortions of the competitive well-functioning of modern regulated markets, which typically creates and crystallizes asymmetric business environments, where outsiders are either excluded ex ante or forced to exit, as well as closed social systems, where the views of those without sufficient economic or political influence or enough visibility are simply without representation. For corruption is not a uniform and stand-alone problem. Before turning to consider such economic effects, it is useful to establish a proper conceptual underpinning by exploring the main theoretical models accounting for its dynamic, the key incentives for corruption which have been elaborated by the economic research, along with the primary variables determining the size of such incentives. This provides us with a solid ground on which to build the following analysis of the costs of corruption in terms of poor economic performance and instability, erosion of democratic institutions, social inequality and threat to fundamental human rights.
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