Fiscal decentralization and government quality in the OECD

Using indicators of fiscal decentralization which control for intergovernmental transfers and grants, it is shown that decentralization has a positive impact on government quality but that this positive effect is mitigated in the presence of regional elections and multi-level government.     

Optimal supervision intensity, collusion, and the organization of work

Abstract.  The intensity of supervision, defined as the proportion of supervisors to bottom-rank productive workers, differs widely across organizations and nations. Analysing three monitoring systems that differ in their supervision intensity, I show that the possibility of collective shirking arrangements can impose a system-dependent limit on the range of implementable performances. This brings about a tradeoff in the choice of the monitoring system: the system that economizes on incentive costs may implement an inferior range of performances. Applications of the model generate work-disutility-, ethics- and job-characteristics-based explanations for variations in the intensity of supervision.     

Competition in bureaucracy and corruption

This paper studies the consequences of introducing competition between bureaucrats. Firms are supposed to invest into eliminating negative externalities of production, while bureaucrats administer the process by issuing licences. Some bureaucrats are corrupt, that is, they issue a licence to any firm in exchange for a bribe. The competition regime is found to create more ex ante incentives for firms to invest, while the monopoly regime is better at implementing ex post allocation, that is, distributing the licences given the firms' investment decisions. Additional results on the effect of punishments and bureaucrats' rotation are provided.     

How does petty corruption affect tax morale in Sub-Saharan Africa?

Revenues from taxation gain in importance to finance economic development in Sub-Saharan Africa. One obstacle to enhancing the willingness to remit taxes can be the extortion of bribes by public officials. Using micro-level data from the Afrobarometer, we show that petty corruption erodes tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent. Differing levels of civic participation and potential access to tax funded services are also found to induce heterogeneous reactions to corruption experience. Applying a mediation analysis, we demonstrate that petty corruption not only has a direct effect on tax morale but also diminishes confidence in tax authorities and therefore affects tax morale indirectly. The harmful effects of corruption experience, however, operate mainly through a generally lowered inclination to uphold high levels of tax morale.     

Corruption and competition in procurement

We consider a procurement problem in which the procurement agent is supposed to allocate the realization of a project according to a competitive mechanism that values bids in terms of the proposed price and quality. Potential bidders have private information about their production costs. Since the procurement agent is also in charge of verifying delivered quality, in exchange for a bribe, he can allow an arbitrary firm to be awarded the realization of the project and to produce a quality level lower than that announced. We compute equilibrium corruption and we study the impact on corruption of the competitiveness of the environment, and in particular of: (i) an increase in the number of potential suppliers of the good or service to be procured, and (ii) an increase of competition in the market for procurement agents. We identify the effects that influence equilibrium corruption and show that, contrary to conventional wisdom, corruption may well be increasing in competition.     

Economics of public good provision: auditing, outsourcing, and bribery

Abstract .  This study investigates a government's contracting decision to audit or outsource the provision of a public good given a potential hidden bribe and information asymmetries. The key findings are the following. First, the bribe and price of the public good are increasing in the corruptibility of the department. Second, the bribe is decreasing in the firm's bargaining power. Third, a bribery equilibrium exists when the department's corruptibility is sufficiently high given the firm's bargaining power. A bribe involves extortion or a compensatory payment depending on the department's corruptibility. Only a compensatory bribe affects the department's contracting decision.     

Distribution and development in a model of misgovernance

This paper presents an analysis of bureaucratic corruption, income inequality and economic development. The analysis is based on a dynamic general equilibrium model in which bureaucrats are appointed by the government to implement a redistributive programme of taxes and subsidies designed to benefit the poor. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with the rich in providing false information to the government. In accordance with empirical evidence, the model predicts a positive relationship between corruption and inequality, and a negative relationship between corruption and development.     

A contest with the taxman - the impact of tax rates on tax evasion and wastefully invested resources

We develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified. This setting is widely applicable for situations where fraudulent reporting with costly state verification takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we find conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources.     

Learning about compliance under asymmetric information

Over time, inspection agencies gather information about firms’ pollution levels and this information may allow agencies to differentiate their monitoring strategies in the future. If a firm is less successful than its peers in reducing emissions, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high-abatement cost firms to mimic low-abatement cost firms by choosing lower emission levels, while the latter might try to avoid being mimicked. We explain firms’ compliance decisions and the inspection agency's monitoring strategy by means of a signaling game which incorporates dynamic enforcement and learning. Interestingly, we show that the ongoing signaling game between firm types might lead to firms over-complying with the emission standard.     

Swiss watch cycles: Evidence of corruption during leadership transition in China

This paper presents evidence of corruption during China's leadership transitions when governmental positions are open for competition. The import value of luxury watches, a popular medium for corrupt exchanges, peaked during regular leadership transitions in 1996–97, 2001–02, and 2006–07. However, imports of nonluxury watches and other luxury items unpopular for corrupt exchanges did not exhibit the same cycle. Nor did imports of luxury watches increase in Hong Kong, Singapore, or the US. During the leadership transition of 2011–12, since wearing a conspicuous luxury watch was by then likely to be exposed on social media and trigger an anti-corruption investigation, this “Swiss watch cycle” vanished.