Seeds of Corruption – Do Market Institutions Matter?

Ten years into the transition process, corruption is now recognized to be a pervasive phenomenon thatcan seriously jeopardize the best intentionedreform efforts. Because of the complex anddeep political economy dynamics surroundingthe process transition economies areundergoing it is essential for policy-makersto understand the causes of corruption. Thispaper develops an integrated analyticalframework of the role basic marketinstitutions play as determinants ofrent-seeking and illicit behavior intransition economies. Using data onlyrecently available on the incidence ofcorruption and institutional development inthese economies, we provide preliminaryevidence on both the systemic links betweendevelopment of market institutions andincentives for corruption and the relativeimportance of such institutions. The mainlesson from our analysis is that awell-established system of marketinstitutions – one characterized by clear andtransparent rules, fully functioning checksand balances, including strong enforcementmechanisms, and a robust competitiveenvironment – reduces rent-seekingopportunities and, in turn, the incentives forcorruption. The empirical results suggestthat high barriers to new business entrantsand soft budget constraints on incumbent firmsare particularly important institutionalfactors engendering opportunities andincentives for corruption. As in otherstudies, the empirical results also supportthe notion that economic development andmaturation of democratic processes both tempercorruption, as does, to a lesser extent,openness to trade.     

How Bad is Corruption? Cross‐country Evidence of the Impact of Corruption on Economic Prosperity

Most people today would argue that corruption is bad for countries' economic development. Yet, we still lack a reliable empirical estimate of the effect. This study addresses the econometric shortcomings of the literature and provides an estimate of the causal impact of corruption on gross domestic product per capita across countries. Certain dimensions of a country's culture are used as instruments for corruption. These instruments stay strong when the other deep determinants of economic development, geography, and the remaining dimensions of institutions and culture are controlled for. In the process of choosing controls, however, the entire set of variables available in the Quality of Governance online database (QOG) that includes all central variables from the literature on institutions and culture are included. It is found that corruption does exert a significant and negative impact on countries' productivity levels.     

Political contributions and corruption in the United States

The empirical evidence presented in this study indicates that political contributions and corruption are complements, rather than substitutes. Based on panel data for seven election cycles, regression results show that in the United States, political contributions and federal corruption convictions are positively correlated. Accordingly, we propose an alternative explanation for the relationship between political contributions and corruption: two components of a comprehensive strategy for rent-seeking. As long-term investments, political contributions influence legislators to change the rules of the game; as short-term investments, corruption influences public officials to sidestep the existing rules, in order to maximize the rent collected.     

Corruption in America

We use a data set of federal corruption convictions in the U.S. to investigate the causes and consequences of corruption. More educated states, and to a smaller degree richer states, have less corruption. This relationship holds even when we use historical factors like Congregationalism in 1890 as an instrument for the level of schooling today. The level of corruption is also correlated with the level of income inequality and racial fractionalization, and uncorrelated with the size of government. There is a weak negative relationship between corruption and economic development in a state. These results echo the cross-country findings, and support the view that the correlation between development and good political outcomes occurs because education improves political institutions.     

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.     

Are electronic government innovations helpful to deter corruption? Evidence from across the world

Electronic government innovations have been a critical development in public administration in recent years. Many countries have implemented e-government policies to enhance efficiency and transparency and combat corruption. This paper examines the impact of e-government on corruption using longitudinal data for more than 170 countries from 2002 to 2020. The empirical results suggest that e-government serves as a deterrent to corrupt activities. We analyse which e-government domains affect corruption, which types of corruption are more affected by e-government and the circumstances under which e-government is more effective in reducing corruption. The empirical results suggest that online service completion and e-participation are important features of e-government as an anticorruption tool. Evidence suggests that e-participation reduces corrupt legislature activities, public sector theft, executive bribery, and corrupt exchanges. The potential of e-government to deter corruption is higher in countries where corruption is moderate or high and economic development is lower. Higher levels of GDP per capita, foreign direct investment, and political rights are also associated with lower levels of corruption.     

Political decentralization and corruption: Exploring the conditional role of parties

This study investigates how national levels of corruption are influenced by the interaction of two factors in political decentralization: the presence of local elections and the organizational structure of national parties. Previous studies have focused primarily on the role of fiscal decentralization on corruption and have mostly ignored the institutions of political decentralization. Using new data in a series of expansive models across multiple countries and years, we find that corruption will be lower when local governments are more accountable to and more transparent toward their constituents. This beneficial arrangement is most likely to occur when local elections are combined with nonintegrated political parties, meaning that party institutions themselves are decentralized from national control. Such an institutional arrangement maximizes local accountability by putting the decision to nominate and elect local leaders in the hands of those best in a position to evaluate their honesty—local electors.     

Is polarization bad?

The adverse effects of political and social polarization on government policies are empirically well documented, yet some democracies seem to cope well or even benefit from diversity. In this paper we develop a theoretical model to show how elections in polarized societies contribute to improve quality of government. We consider both polarization among citizens and political actors (political polarization), where the second is endogenously determined by parties competing to win the support of the majority of voters. We find that more heterogeneous societies are more likely to be politically polarized, but that the divergence of positions in the political arena helps the electorate control government corruption by raising electoral stakes. Our results, which are consistent with the findings of a substantial empirical literature, suggest that, when funneled into political competition, polarization may help improving quality of government and policies.     

Media freedom and democracy in the fight against corruption

Democratization and media freedom have been suggested as useful tools in the fight against political corruption, but so far their interplay in this fight has received scant attention. We present a game theoretic model which allows for varying quality of media freedom and democratic institutions. The model predicts, among others, that democratization and media freedom are complements in the fight against political corruption. We test our theoretical predictions using differences-in-differences estimations and panel data covering 129 countries from 1980 to 2007. We find evidence of causal effects of democratization and media freedom on corruption, and that the two are complements. Our main results hold after controlling for income, country fixed effects, and continent-specific time-varying shocks.     

Casinos and political corruption in the United States: a Granger causality analysis

The commercial casino industry experienced an unprecedented expansion in the United States during the 1990s. As the industry has grown, so has the anecdotal evidence that links the casino industry with political corruption. However, there have been no empirical analyses of the issue. We use state-level panel data from 1985–2000 to posit a Granger causality analysis of the relationship between corruption convictions of state public officials and the predicted adoptions of casinos at the state level. We find evidence that predicted casino adoptions Granger cause corruption convictions. This finding is suggestive of a scenario of regulatory capture and may help explain why state-level gaming regulatory agencies have a history of softening gaming regulations after the initial introduction of casinos. Our study provides the first empirical evidence linking casinos to political corruption.     

Political uncertainty and international corruption

This article uniquely considers influences of political uncertainty on corruption. Political uncertainty disturbs existing corrupt (and legal) contractual relations inducing greater corrupt activity to strengthen existing alliances and foster new ones. Results across two measures of cross-national corruption show that political assassinations increase corruption in different variations and time periods, and a general index of political instability mostly has the same effect. The influences of other factors on corruption are in general accord with the literature. These findings are generally robust to consideration of alternate dimensions of political uncertainty.     

The Role of the Judiciary in the Public Decision‐Making Process

Empirical work on the relationship between political corruption and the design of public institutions suggests that the structure of judiciaries is an important determinant of corruption. This study develops a simple political economic model to investigate the role of judicial oversight in the policy‐making process for corruption deterrence, focusing on two dimensions of quality of the judiciary, namely efficiency and integrity. Our analysis explicitly accounts for the possibility that, while being independent of the political authority, the judiciary itself may be vulnerable to pressure from special interests. We study endogenous policy‐making under complete information and provide general conditions for the existence of deterrence (zero‐bribe) equilibria. In particular we show that preserving the independence of judiciaries in corrupt societies proves crucial to the existence of corruption‐deterrence effects.     

The transition of corruption institutions and dynamics

The paper analyzes the strong but complex relation between corruption and development. The corruption/honesty index is explained by three variables measuring aspects of development: Income, Polity and Fraser (for Economic Freedom). The last two indices represent the political and the economic system. Two problems arise: (i) Development is a common factor in all four variables, giving the variables strong confluence, so it is difficult to sort out the contribution of each explanatory variable. However, kernel regressions on the corruption/income scatter give a well-defined long-run transition path, which permits an identification of the specific contributions of institutions to corruption. (ii) The correlation of corruption to the first difference of the three development variables is negative. This gives a substantial lag in the corruption/income relation in the form of wide J-curves, but the main direction of causality is still from development to corruption. High income and modern institutions cause low corruption after some time. The corruption/development-relation is a fuzzy but strong long-run connection.     

ECONOMIC FREEDOM VERSUS POLITICAL FREEDOM: CROSS‐COUNTRY INFLUENCES ON CORRUPTION*

Using a well‐known index of corruption, this paper examines the determinants of corruption for a large sample of countries. Specifically, the present study brings empirical evidence to bear on the question of whether economic freedom or political freedom serves as a deterrent to corrupt activity. In particular, does greater economic freedom or greater political freedom yield a more ‘clean’ society? Our results show that greater economic freedom seems to matter more in this regard. Examining different components of economic freedom, we find that not all these components are equally effective in reducing corruption. For instance, monetary policy seems to have a stronger influence on the level of corrupt activity in a country than fiscal policy. Robustness of these findings is checked and policy implications are discussed.     

The Determinants of Location Choices of China's ODI: Institutions,Taxation and Resources

China has become the third largest source of outward direct investment (ODI). This paper studies how institutions in the host countries affect the location choices of China’s ODI. Based on a deal-level sample from 2002–2011, this paper empirically tests how political institutions, political stability, government effectiveness, regulatory quality, rule of law and contrd of corruption in the host countries affect the location choices of China’s ODI. On top of these institutional factors, we study the effects of tax evasion and natural resources in host countries, and their interactions with institutional factors. We find that political institutions in the host countries are not major concerns of the ODI, while government effectiveness, regulatory quality, and control of corruption have significant effects on the locations of ODI. In addition, China’s ODI tends to avoid countries with strict legal systems. Tax evasion and resources are also major motives of China’s ODI. General institutional quality and tax evasion are substitutes in China’s ODI location decisions.     

The power of negative thinking: corruption,perception and willingness to bribe in Ukraine

This study provides an empirical analysis of the association between corruption perception and the willingness to offer bribes, as well as of the influence of different sources of information on corruption perception in the Ukraine. The higher the perceived corruption in an organization, the more probable it is that a person dealing with that organization will offer a bribe, therefore supporting corruption. Since corruption scandals in Ukraine seldom result in legal action, information about corruption in the mass media might actually encourage people to give bribes. This study found that corruption perception is one of the key factors in giving a bribe and that its positive/negative effects strongly depend on institutions and government policies.     

Corruption and Policy: Back to the Roots

Corruption is now recognized to be a pervasive phenomenon that can seriously jeopardize the best-intentioned reform efforts. This paper presents an analytical framework for examining the role basic market institutions play in rent-seeking and illicit behavior. The empirical results suggest that high barriers to new business entry and soft budget constraints on incumbent firms are particularly important institutional factors engendering opportunities for corruption. The findings also support the notion that economic development and maturation of democratic processes both temper corruption, as does, to a lesser extent, openness to international trade.     

Relationships between corruption,political orientation,and income inequality: evidence from Latin America

This research sheds light on the analysis of the impact of corruption and political orientation on income distribution in Latin America. Although it has been theoretically demonstrated that corruption worsens the income distribution, the empirical evidence has yielded ambiguous results based on biased estimates not considering a measurement error in the estimation of inequality. This article fills this gap by correcting the previous measurement error bias in the fixed-effects estimation. Additionally, political orientation and its relationship with income inequality are also investigated. The sample covers 18 Latin American countries between 1996 and 2012. Results reveal that corruption increases income inequality.     

Initial conditions and privatisation as causes of post-communist corruption

This article investigates the economic determinants of corruption in post-communist countries. We conduct an empirical verification of two research hypotheses using EBRD and World Bank data on 27 post-communist economies over the 1996–2014 period. The first hypothesis suggests that corruption is rooted in the communist past, when these countries embraced communist institutions, social norms, as well as low-development structural factors broadly defined as initial conditions. The second hypothesis is that the flawed transition process led corruption to increase because politics and business were never separated. The elites pushed measures that preserved their status while obstructing reform policies that might endanger their interests. Our empirical results demonstrate that both hypotheses are valid to a limited extent, while revealing a more complex view of the reforms and initial conditions. Corruption seems to be related to the natural resource curse, to the lack of small-scale privatisation and to a long history of underdevelopment that could have preceded communism.     

LEGAL CORRUPTION

We challenge the conventional definition of corruption through the analysis of legal forms of corruption, and by devoting special attention to influence induced by the private sector. This paper studies the determinants of the world pattern of legal and illegal corruption by proposing a simple theoretical model of endogenous corruption and related legal framework, and its thorough empirical test. Three types of equilibrium outcomes are identified: one based on illegal corruption, where the elite does not face any binding incentives to limit corruption; one centered around legal corruption, where the elite must incur a cost to legally protect corruption; and finally a no‐corruption outcome, where the population is able to effectively react to corruption. Testable implications from the model are derived based on country‐wide parameters. Crucially, we use a rich corporate survey, including 8,279 firms in 104 countries, tailored for this research, and featuring measures of legal corruption that are novel to the literature. The microdimension of the database enables improving on familiar shortcomings associated with the use of endogeneity‐prone, country‐wide indices of perceived corruption. The empirical results, making use of a broad range of proxies and sources, generally validate the model's explanations.