Why is corruption less harmful in some countries than in others?

Empirical evidence shows that not all countries with high levels of corruption have suffered poor growth performance. Bad quality governance has clearly been much less damaging (if at all) in some economies than in others. Why this is so is a question that has largely been ignored, and the intention of this paper is to provide an answer. We develop a dynamic general equilibrium model in which growth occurs endogenously through the invention of new goods based on research and development activity. For such activity to be undertaken, firms must acquire complementary licenses from public officials who are able to exploit their monopoly power by demanding bribes in exchange for these (otherwise free) permits. We show that the effects of corruption depend on the extent to which bureaucrats coordinate their rent-seeking behaviour. Specifically, our analysis predicts that countries with organised corruption networks are likely to display lower levels of bribes, higher levels of research activity and higher rates of growth than countries with disorganised corruption arrangements.     

CORRUPTION AND INCOME INEQUALITY IN THE UNITED STATES

In this study we analyze the effects of corruption on income inequality. Our analysis advances the existing literature in three ways. First, instead of using one of the corruption indices assembled by various investment risk services, we use an objective measure of corruption: the number of public officials convicted in a state for crimes related to corruption. Second, we minimize the problems which are likely to arise because of data incomparability by examining the differences in income inequality across the United States. Finally, we exploit both time series and cross‐sectional variation in the data. We find robust evidence that an increase in corruption increases income inequality. (JEL D31, D73, I32)     

Who gains from non-collusive corruption?

Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs. If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets.     

Nonergodic Corruption Dynamics (or,Why Do Some Regions within a Country Become More Corrupt than Others?)

Two key aspects of corruption are strategic complementarity (the greater the prevailing level of corruption, the more likely is a particular agent to engage in it) and localized interactions (officials typically interact repeatedly with a small group of other officials, their colleagues). This paper builds a simple model with these two features, which studies the evolution of corruption. Over time, local networks of corruption (or honest behavior) endogenously emerge, and otherwise identical regions can end up with divergent corruption levels. Anti‐corruption policies are studied.     

The political economy of corruption and the role of economic opportunities1

In many developing and transition countries, we observe rather high levels of corruption. We argue that the missing political support for anti‐corruption policies is due to a lack of economic and financial reforms. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we show that this, together with the lack of economic opportunities, makes anti‐corruption policies less likely. Compared to a reformed economy, more voters are part of the corrupt system and, more importantly, rents from corruption are distributed differently. Economic liberalization increases the support for anti‐corruption measures. The additional effect of financial liberalization is ambiguous.     

Is corruption a greater burden for registered MSEs? Evidence from Zambia

If corrupt bureaucrats target registered firms, then corruption may discourage registration. Using data from a survey of 4,801 micro and small enterprises (MSEs) in Zambia, this paper looks at whether corruption is a more or less serious problem for registered MSEs. Consistent with earlier studies, the results suggest registered MSEs are more concerned about corruption than unregistered firms are. The paper also proposes two reasons why corruption might affect registered MSEs differently than it affects unregistered firms. We first suggest that registered firms might meet with government officials more often than unregistered firms, giving corrupt officials more opportunities to demand bribes from them, but we also suggest that registered firms might be less vulnerable when officials demand bribes because they are more able to complain about bribe demands. This could offset registered firms' disadvantage because of more frequent meetings. The evidence supports the first, but not the second, hypothesis. Registered firms were more likely to meet with government officials but were not consistently less likely to pay bribes when they did meet with them.     

Why principals tolerate biases of inaccurate agents

Some agents are more accurate than others in estimating the best policy. The more accurately an agent estimates a policy's effects, the more he will resist biases, such as bribes from a special interest. Thus, a special interest needs to pay a larger bribe to an accurate agent than to an inaccurate agent. The accurate agent who is biased will then more likely cause harm than does an inaccurate agent who favors the special interest. Therefore, the principal may gain more from controlling biases of an accurate agent than of an inaccurate one. Thus, high ability of public officials may be associated with little corruption.     

A MODEL OF BUREAUCRACY AND CORRUPTION*

We analyze bureaucracy and corruption in a market with decentralized exchange and “lemons.” Exchange is modeled as a sequence of bilateral, random matches. Agents have private information about the quality of goods they produce and can supplement trade with socially inefficient bribes. Bureaucracy is modeled as a group of agents who enjoy centralized production and consumption. Transaction patterns between the bureaucracy and the private sector are fully endogenous. Centralized production and consumption in the bureaucracy give rise to low power incentives for the individual bureaucrats. As a result, private agents might bribe bureaucrats, whereas they do not bribe each other. An equilibrium with corruption and an equilibrium without corruption can coexist. We discuss some welfare implications of the model.     

Modelling the dynamics of corruption and unemployment with heterogeneous labour

This paper presents an endogenous growth model with heterogeneous labour, endogenous unemployment, and public sector corruption. Unlike most previous studies, the model does not separate public officials and private individuals into two distinct groups. Instead, taking up bureaucratic appointment as a public servant is modelled as an occupational choice, which then allows for the endogenous determination of the proportion of public officials, the share of corrupt officials among them, and the public investment efficiency of the economy. The dynamics of endogenous corruption and unemployment are studied using numerical policy experiments based on a stylized representation of a middle-income African economy with high corruption and unemployment. The main finding is that, large-scale public infrastructure push has no effect on raising growth in an economy with high corruption. However, if preceded by social and anti-corruption policies that successfully induce a structural change, it will then be effective in raising growth.     

Kleptocracy and tax evasion under resource abundance

Evidence has shown that petroleum wealth is associated with less transparency and at the same time less tax collection. In this paper, we find that the two issues are linked through the citizens’ tax evasion behavior. We develop a model to explain this link and conduct extensive empirical tests of its validity. The explanation is that officials tradeoff greater transparency to improve tax compliance against less transparency to increase gains from corruption. Oil windfalls diminish tax revenue needs, causing officials to optimize on less transparency. Seeing this, citizens optimize on a lower level of tax compliance. At equilibrium, both decline with a positive oil shock. We also study the alternative channel in which tax compliance responds to enforcement. Transparency is found to be the more robust channel. Ignoring citizens’ strategic behavior would lead to predicting suboptimal investment in state capacity for tax enforcement. Using giant oil discoveries data combined with oil price data, we develop a dynamic composite instrument and estimate the model with a dynamic panel system generalized method of moments. We find robust support for our explanation and the model's deep structure for 130+ countries and the 1980–2010 period.     

Democracy,Rule of Law,Corruption Incentives,and Growth

We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters: the “technology of corruption” is the ease with which rent‐seekers can capture a proportion of public spending. The “concentration of political power” is the extent to which rent‐seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by our proxies for legal and political institutions in countries where political rights and judicial institutions, respectively, are limited.     

CROSS‐COUNTRY EVIDENCE OF CORRUPTION SPILLOVERS TO FORMAL AND INFORMAL ENTREPRENEURSHIP

Using cross‐country data this paper examines the spillovers of corruption to formal and informal entrepreneurship in neighboring countries. Whereas research has shown that entrepreneurs move underground to escape corruption, we argue that entrepreneurs may also seek refuge in neighboring countries. Indeed, the empirical results show that in response to a ceteris paribus increase in corruption in neighboring countries formal entrepreneurship increases in the home country with no effect on informal entrepreneurship. This is consistent with entrepreneurs circumventing corrupt public officials by immigrating to countries with presumably less corruption. These results withstand a battery of robustness checks. (JEL D73, L26)     

Corruption,competition and democracy

This paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition. It is hypothesized that a government agent that controls access to a formal market has a self-interest in demanding a bribe payment that serves to limit the number of firms. This corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it. Under quite normal assumptions about the shape of the graph of the detection function, multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition, and another is characterized by low corruption and high competition. Some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related.     

Trade liberalization,wilful credit defaults and bank bribery in a credit-constrained economy

The rising incidence of credit defaults may cause credit crunch. This affects the ability of firms to finance working capital and also fixed capital formation. Naturally, this is a major macroeconomic shock. This paper is an attempt to address the microeconomic foundation of such macroeconomic shock. We provide a theoretical framework to explain the economic rationale behind ‘wilful corporate defaults’ and ‘financial corruption’ in the specific context of trade liberalization. First, we model the behavioural aspects of wilful corporate defaulters and bank officials to determine the bank bribe rate as an outcome of the Nash bargaining process in a two-stage sequential move game. Based on the results of the partial equilibrium framework, we examine aspects of trade liberalization in an otherwise 2 × 2 general equilibrium framework. We also compare the efficacy of punishment strategies to economic incentives to deter credit defaults and banking sector corruption. Methodologically, our analytical model integrates finance capital distinctly from physical capital in Jonesian general equilibrium framework. Interestingly, our findings indicate that there exists a trade-off at equilibrium between curbing credit defaults and bribery. We also find that not all punishment strategies are equally effective at deterring credit defaults if general equilibrium interlinkage effects are carefully dealt with.     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)     

Corruption and privatization

This paper analyses the relation between corruption and privatization. In particular, we study how corruption affects the acquisition price and the post-privatization market structure. The model predicts that privatization in countries with highly corrupt government results in a higher degree of market concentration than in countries where governments are less corrupt. The acquisition price is also likely to be higher when a government is highly corrupt than when government officials are honest or moderately corrupt. Finally, and perhaps surprisingly, we demonstrate that a stronger propensity to embezzle state revenues may reduce government officials' benefits from corruption. The reason is that the more eager the government officials are to take bribes, the cheaper they are to buy.     

What leads to official corruption in China? A politico-economic analysis of economic opportunities and government corruption across China’s provinces

This paper investigates the relationship between economic opportunities and official corruption in China. We construct a cross-province sample of corrupted officials to analyse the effects on official corruption of mineral reserve, coal production, real estate and road construction, while including control variables such as population, GDP per capita, economic growth rate, private assets, provincial government capacity, fiscal transparency and distance of the province from Beijing. Spanning from December 2012 to November 2015, our sample contains 526 high-level government officials who worked in various provinces in China. We find through multivariate regression that economic opportunities represented by coal, minerals, real estate and road construction all have a positive and significant effect on official corruption in China at the levels of provincial department director or deputy director; meanwhile, capacity of political extraction, road construction and coal production are better indicators of official corruption at the level of governor or deputy governor.     

Corruption governance and its dynamic stability based on a three-party evolutionary game with the government,the public,and public officials

The current state of corruption in China is still worrisome. Corruption among public officials depends not only on their subjective will, but also on the success rate of government investigations and public whistleblowing. Based on the evolutionary game theory, this study constructs an evolutionary game model with the government, the people, and public officials and solves the dynamic model. The authors also provide a numerical simulation of the proposed model to confirm theoretical predictions. The results reveal that when the government’s success rate reaches a certain threshold, public officials will trend to a strategy of no bribery, and at this threshold, raising the cost of bribing public officials can quickly prevent them from corruption. At the equilibrium, the public will trend toward a strategy of no whistleblowing. The findings of this study are of great significance to the current anti-corruption debate in China.     

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.     

Corruption and local democratization in Indonesia: The role of Islamic parties

Indonesia has a tradition of corruption among local officials who harass and collect bribes from firms. This paper examines whether corruption is affected by local democratization and by the party composition of local assemblies. Democratization occurred in 1999 and decentralization in 2001. We have firm-level data for 2001 and 2004. The 2001 data benchmark corruption at the time of decentralization. We find that corruption declines between 2001 and 2004 overall, but much less so in districts with more secular party as opposed to Islamic party representatives in district assemblies. For a larger sample of districts, correspondingly, we find that corruption in 2004 is more in districts which voted more in favor of secular party representatives in the first elections in 1999. We argue that the effects seem to be causal, over above any effects of changing religiosity and economic circumstances across districts.