The possibility of facing corrupt managers is an important factor explaining foreigners' hesitations about investing in developing countries. This paper aims at investigating how reputation concerns influence managers' behavior and country attractiveness. It is shown that in a dynamic framework with incomplete information a rational equilibrium exists where the manager's best choice is related to the weights he respectively assigns to reputation and illegal income. Economy-wide corruption, development prospects and global profitability appear to depend on the duration of the relationship between investors and managers.
BESANCENOT, D. and VRANCEANU, R. (2000). Endogenous Corruption Risk and Foreign Investment in Developing Countries. In: Proceedings of the Globalization in the 21st Century Conference: International Business Volume II. International Trade and Finance Association (ITFA), pp. 415-429.