Corruption and the costs of redistribution: Micro evidence from Indonesia

This paper examines the degree to which the corruption in developing countries may impair the ability of governments to redistribute wealth among their citizens. Specifically, I examine a large anti-poverty program in Indonesia that distributed subsidized rice to poor households. I estimate the extent of corruption in the program by comparing administrative data on the amount of rice distributed with survey data on the amount actually received by households. The central estimates suggest that, on average, at least 18% of the rice appears to have disappeared. Ethnically heterogeneous and sparsely populated areas are more likely to be missing rice. Using conservative assumptions for the marginal cost of public funds, I estimate that the welfare losses from this corruption may have been large enough to offset the potential welfare gains from the redistributive intent of the program. These findings suggest that corruption may impose substantial limitations on developing countries' redistributive efforts, and may help explain the low level of transfer programs in developing countries.