This paper examines the joint effect of economic and political liberalization in combating corruption. It attempts to construct a simple demand-supply model of competition and corruption. The level of corruption is determined jointly with an interaction of the level of political and economic competition. On the one hand, corrupt agents who are in charge of licensing and regulation in the industrial sector restrict the number of firms for their own interest. On the other hand, corruption flourishes in the absence of efficient monitoring and a more democratic government, and the citizens’ involvement in governance leads to more careful monitoring of agents which in turn can reduce the level of rent-seeking behavior of the bureaucrats. The empirical section tests whether the combined effects of political and economic liberalization reduce corruption and its subsequent implications on the economy. The political and economic liberalizations are captured by democracy and economic freedom indices. The results find that democracy and economic freedom have some opposite effects on corruption at the low level of political and economic liberalization however, at the higher level both economic and political freedom reduce corruption substantially. In other words, in the absence of economic freedom greater democracy increases corruption, whereas, if economic freedom already exists in a country then democratization helps in combating corruption. The result suggests that economic freedom is crucial in combating corruption.