Corruption

Prof Sukhtankar Econ 24

What is corruption?
Misuse of public office for private gain
What is misuse?

Examples
Sale of government property by government officials Embezzlement of government funds Kickbacks in public procurement Bribery

Famous cases
In 2001, missing $1billion in oil revenues (total humanitarian aid to Angola in 2001 about $300 million) Mobutu Sese Soko (Zaire) - $5 billion Ferdinand Marcos - > $10 bil ? Mohamed Suharto - > $25 bil ?

Embezzlement and consequences

Embezzlement examples
Reinikka-Svensson (2001): 87% of block grants meant for schools in Uganda diverted Niehaus and Sukhtankar (2010): 70-80% of labor budget in NREGA stolen in Orissa

Consequences
Distorts optimal public finance: marginal social cost = (1 embezzlement) x marginal social benefit Olken (2009): Corruption in rice distribution scheme in Indonesia makes progressive scheme regressive

Are there circumstances under which we may not worry so much about embezzlement?
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Bribes and consequences

Example: 1998 Uganda enterprise survey (Svensson 2001)
Employers association fielded questionnaire: Many business people have told us that firms are often required to make informal payments to public officials to deal with customs, taxes, licenses, regulations etc. Can you estimate what a typical firm in your line of business has to typically pay in a year? 81 percent of firms said they had to pay a bribe Formal sector more likely to pay bribe Larger firms pay more bribes Bribe rate increases with profits, falls with alternative uses of capital Average amount paid - 8,300 US dollars with median payment of 1800 US dollars- correspond to 88 US dollars per worker or roughly 8 percent of total costs.

Consequences
Additional tax on businesses Welfare-reducing: poor pay far more of their income in bribes than rich (Hunt 2010)
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Is bribery really a problem?

Whats wrong with paying bribes to public officials to privately consume public services?
Move from tax finance to combination of user fee and taxes Greasing the wheels: May be efficiency improving if avoids inefficient rules or creates incentives for quality service delivery

On the other hand

Not all rules inefficient Without competition in service provision, the bribe will be distortionary (although taxes are too) Delay and uncertainty created when multiple individuals need to be involved Reduces pressure to reform inefficient laws Creates dynamic incentives to create red-tape

How about kickbacks for getting preferred contracts?

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Corruption and GDP

Are poor/ rich countries more likely to be corrupt? Corruption inverse U-shaped wrt income
Very poorest countries not much to steal, less need to delegate tasks Need heavily regulated economy (demand for going around rules and regulations) Need poor legal framework (incapable of punishment)

How about growth? Mauro (1995): Corruption and red tape negatively correlated with growth
Uses ethnolinguistic fractionalization as instrument for institutional efficiency
Is this a good instrument?
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Understanding corruption
Theoretical approaches
Industrial organization Principal agent Institutional approaches Cultural approaches

The industrial organization of corruption

Does competition reduce corruption? Is centralized or decentralized corruption better?

Understanding corruption
Issues in principal agent approach
Does monitoring work in reducing corruption?
What kind top-down or bottom-up?

Do efficiency wages work? Do political incentives work?

Institutional approaches
Mechanism design: beyond principal-agent issues

Is corruption just cultural?

Is it just the developing country counterpart of lobbying?
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Industrial organization - I
Ben Olken and Patrick Barron Indonesia Enumerators ride along with truckers recording bribes paid on road through states of Aceh and North Sumatra
Pay military and police to avoid harassment at checkpoints along the road Pay at weigh stations to avoid fines for driving overweight Pay protection to criminal organizations These payments average 13% of total cost of trip (USD$40)

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Industrial organization - II
Indonesia government withdraws police and military from roads in Aceh to enforce a peace agreement what do you expect happens to bribes in North Sumatra? Market structure matters for total bribes paid
Average bribe paid in North Sumatra increases Not enough to offset lost revenue from reduction in checkpoints
Decentralized price setting in a chain of vertical monopolists

Amount of surplus that can be extracted varies depending on checkpoints location in trip, because driver must successfully clear all checkpoints how do you expect it varies between first and last checkpoint?

Sequential hold-up
Different officials have different bargaining power Downstream checkpoints appear to have more bargaining power & receive higher bribes

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Monitoring agents
Greater top-down oversight & threats of punishment Grass roots monitoring, information Higher salaries to bureaucrats What actually works?

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A corruption field experiment in Indonesia

Ben Olken WB Roads project in Indonesia Randomly select villages to be told after award but before construction that their project would be audited by the central government auditing agency
Increase probability of audit from 4 percent to 100 percent

Randomly organize grass-roots oversight meetings with large number of invitees

Increase participation in oversight by about 40 percent Random subset of communities receive anonymous comment forms too that would be read at meetings
Lots of completion

Engineers independently estimate prices and quantities of inputs that went into newly constructed roads
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Audits appear successful

Associated with substantive reductions in unaccounted for materials and labor expenses (nearly 30 percent)
Additional awarding of labor contracts to family members of project officers
Alternative forms of corruption may be substitutes

Still 20 percent of expenditures unaccounted for

Neither grass-roots approach has significant effect on missing expenditures

Invitations seem to reduce missing labor expenses with no effect on materials (most of the source of missing expenditures)
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Grass-roots monitoring take 2

Reinikka-Svensson (2004) Block grants for school finance in Uganda Embezzlement levels high Government campaign to provide information on how much money was actually sent to schools Seemed to be effective: exposure to information reduced corruption Bjorkman-Svensson (2009) Community monitoring campaign improved health outcomes in Uganda Maybe something about Ugandan context matters? 16

Limits on both approaches

Top-down: what are the incentives and oversight for the auditors?
Quis custodiet ipsos custodes? (Who will guard the guards?) Hierarchies of corruption (Wade article)

Bottom-up: information and voice dont matter if costs of complaining too high/ probability of successful complaint too low
Niehaus and Sukhtankar (2011) 0% of wage increase passed on to beneficiaries in government employment program
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Efficiency wages, sort of

Direct evidence on efficiency wages and corruption difficult to find (only 1 exception) Niehaus-Sukhtankar Golden Goose effect
Illicit rents can play the role of efficiency wages

When the marginal benefit to a corrupt act increases, expect officials to engage in more corruption But if the benefit change is permanent, then career concerns matter Must trade off current corruption (and consumption) against increased opportunities for corruption in the future
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Golden Goose effects

Like efficiency wages, except w/ illicit rents rather than legal wages We exploit exogenous change in statutory wage paid on NREGA projects
Makes corruption more attractive since reporting an extra (fake) day worked pays you more Affected only one of two kinds of projects
Look at effect on other kind of project Look at effect in areas that had relatively more of affected projects before and after shock

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GG effects and efficiency wages

Strong evidence of GG effects
Corruption mitigated by 72% as compared to simple static effect of wage shock

However, levels of rents extracted very high

Range from 150-1100 times official compensation

What does this say about ability to use efficiency wages to control corruption?

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Is there a culture of corruption?

Diplomats stationed in NYC have diplomatic immunity Prior to (still debated) rule change, this meant parking tickets rarely enforced Fisman-Miguel look at unpaid parking tickets of diplomats What countries do you expect diplomats with most unpaid tickets come from?

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Diplomats from more corrupt countries have more unpaid parking tickets

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Is there a culture of corruption?

Barr and Serra (2006), in an experiment at Oxford University, show that a participant's willingness to offer bribes in a laboratory setting is correlated with corruption record in his/her home country. What other explanation is consistent with these facts? Corruption in low income countries caused by opportunistic individuals who are able to succeed in existing politico-economic system and also ones able to get coveted diplomatic jobs in New York / send family members to prestigious universities abroad
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