Does Corruption Influence Debt?

Abstract: This paper analyzes external debt in developing countries and whether its variability can in part be explained by corruption levels. To combat endogeneity, four different instrument variables are tested and I find etnolinguistic fractionalization as the only valid instrument. The results prove robust to the inclusion of an instrument where corruption and aid prove significant as explanatory variables for external debt. Moreover, regional dummies have been added and found to be significant for the regions of Asia and the Middle East.