DEMOCRACY-GOVERNANCE-CORRUPTION NEXUS: Evidence from Developing Countries Saranjam BAIG* and Yi FENG** Abstract In contrast to the arguments by the existing literature on corruption and democracy that dem- ocratic countries have lesser corruption, this paper argues that democracy, by itself, may not be a corruption-deterring institution. The authors, however, suggest that democracies coupled with effective governance structures are the ones to mitigate corruption. Despite the ubiquity of literature on corruption, missing in the academic scholarship is the question whether the impact of political institutions on corruption is conditional on governance effectiveness, al- though democracy and corruption are the phenomena for which the governance effectiveness of a country could be an important factor. Most importantly, the existing literature has failed to answer the question whether democracies always affect corruption in the same way, re- gardless of the country’s governance effectiveness and capacity. Little attention has been paid on democracy-governance-corruption nexus. By assuming that democracies and political in- stitutions are not corruption-deterring institutions, in themselves, at least in developing coun- tries, this paper hypothesizes that the lack of governance effectiveness is a key driver of corruption. This comparative analysis of 98 developing countries for the years 2002-2010 using ordinary least-squares and two-stage least squares methods with lags as instrumental variables supports the authors' hypotheses using different measures of corruption (the World Bank's Control of Corruption Index and the Transparency International's Corruption Percep- tions Index). The explanatory power of governance effectiveness is at least as important as conventionally accepted causes of corruption such as economic development. I. Introduction The persistence and uniformity of rampant corruption in developing countries suggest that they share common drivers of corruption [Khan (2006)]. On the one hand, understanding the determinants of corruption is crucial for any successful anti-corruption campaign. On the other hand, the failure of anti-corruption poli- ciesin developing countries suggested by conventional economic and political analysis provides a rationale for a detailed investigation of corruption dynamics in these countries. In the last two decades, the burgeoning academic scholarship on corruption and its correlates has helped shape the subject of corruption into a distinct study. Despite Pakistan Journal of Applied Economics: Special Issue 2016, ( - ) * Assistant Professor, Department of Economics, Karakoram International University, Pakistan, ** Professor, and Luther Lee Jr. Memorial Chair in Government at School of Social Science, Policy and Evaluation, Claremont Graduate Uni-versity, California, USA.