ABSTRACT This paper explores the interplay between transfer policies, R&D, corruption, and economic development using a general equilibrium model with heterogeneous agents and a government. The government collects taxes, redistributes fiscal revenues, and undertakes public investment (in R&D, infrastructure, etc.). Corruption is modeled as a fraction of tax revenues that is siphoned off and removed from the economy. We first establish the existence of a political‐economic equilibrium. Then, using an analytically tractable framework with two private agents, we examine the effects of corruption and evaluate the impact of various policies, including redistribution and innovation‐led strategies.