Category Archives: Corruption



W. Easterly

Chapter 12 from The Elusive Quest for Growth W. Easterly

A Summary

In a Nutshell

Corruption as theft retards growth. So to do bribes paid to get licences to produce etc.  as they act as a direct tax on production [although only in the case of corruption without theft where the government goods are more expensive – Shleifer]. Corruption and growth are inversely related, as are corruption and investment.

He distinguishes between decentralized and centralized corruption as having different effects. [This is the same as the Shleifer independent monopolists point.] This has the effect of implying that under certain conditions it may be better to have strong dictatorship as opposed to a weak democracy. This is really just another way of saying that a strong state can prevent corruption, or at least can centralize it such that it is not as dangerous for growth.

What are the determinants of the level of corruption?

  • Weak government – see above
  • Foreign Aid – a resource to be captured, especially in ethnically heterogeneous economies.
  • Institutional quality – checks and balances good incentives for workers, little red tape.
  • Property rights – strong contracts mean that payments are not necessary to maintain property rights. Expropriation risk increases corruption as people pay not to have their property expropriated.
  • Macro policy – e.g. an overvalued exchange rate means an incentive to create a black market. Trade policy/restrictions leads to incentives to get around them etc.



R. Tangri & A. Mwenda

Journal of Modern African Studies, 44, 1 (2006)

A Summary


In a Nutshell

Anti-corruption drives in Africa have been focussed largely on reducing routine levels of corruption. Replacing the state economy with market mechanisms, promoting accountability and transparency in government operations and other measures have reduced the opportunities for corruption as well as increasing the chances of getting caught. However, the reforms necessary to reduce corruption at the highest level, such as promoting political competition, and institutions that oversee the prosecution of corruption at high levels depend for their effectiveness to a large degree on both financial capability (which is often low), and cooperation from the elite leaders (which is often absent). This latter phenomenon persists despite continued rhetoric by leaders as to their willingness to tackle corruption.

This indicates that the nature of a country’s political system cannot be ignired when thinking about corruption. For example, Uganda has been a virtual one party system for decades and this constrains the possibility of the legislature and the judiciary holding the government to account. Whilst corruption is undoubtedly used for private gain, it is also used to perpetuate the regime through the use of funds for campaigning, and this explains why top political leaders have shown limited political will to contain such corruption. It also means that those charged with overseeing corruption prosecutions have an incentive not to proceed as they depend for their existence on one very firm set of political benefactors. Because elite corruption is am important means of consolidating the government in power, top leaders have influenced and controlled anti-corruption bodies whenever they have threatened to expose the corrupt ways of Uganda’s state elites.

Also at fault are IFIs and donors who are more focussed on economic goals than corruption reduction.



A. Shleifer and R. W. Vishny

The Quarterly Journal of Economics, Vol. 108, No. 3 (Aug., 1993)

A Summary


In a Nutshell

The extent of corruption very depends upon the structure of the corruption network, and this has implications for growth within an economy. The paper is concerned with the sale of government property for personal gain such as passports, licences etc. which enable private agents to pursue economic activity. Insofar as officials have control over these goods they can collect bribes. The level of bribe they are able to extract depends upon the structure of the bureaucracy. In particular the presence of competition within government agencies will tend to drive the level of bribes toward zero.

In many ways bribes behave like taxes, with one critical difference: corruption is generally illegal. This facet has important implications for resource allocation and growth because officials will generally divert resource allocation decisions toward an allocation where it is easier to maintain secrecy regarding corruption. This distortion has negative affects regarding the potential for growth.

 [The article is primarily concerned with lower levels of corruption and as such may not be a hugely useful tool for analysing high level corruption by presidents etc. who are subject to different constraints.]

Basic Model

  • Government produced goods  are sold by officials who can restrict quantity supplied. An important reasons many permits/licences exist is to give officials the power to deny them (de Soto). [The implication being that if regulation was relaxed there would be less room for corruption to exist. Under de Soto’s theory regulations were put in place to restrict the ability for the new economic migrants to urban areas in Latin America from claiming a slice of the economic pie that belonged exclusively to the elites.]

The objective of the official is to maximise the level of bribes he can collect. The goods cost him nothing to provide personally. How much does he collect? Two possibilities

  1. Without Theft – here the official receives the official price of the good, plus a bribe. He pay the official price to the government. The marginal cost then of providing the good is the official price (that he must pay over). This raises the price of the good.
  2. With Theft – the official receives money but pays nothing to the government. The price to the consumer may be lower than the official price. Here the marginal cost of provision is zero. This potentially lowers the cost of the good, and is thus more attractive to consumers.
    • If the official does not price discriminate between buyers he is a monopolist and simply sets MR=MC.
    • If the official can be penalised , and if the P(detection) and the punishment are independent of the bribe and the number of people that pay it, then the official will charge the same until the expected cost of provision no longer makes corruption profitable [indicating that severe penalties for corruption could be a tool to curb it]. However, if the punishment increases with the level of the bribe he may reduce the bribe and increase output. If it increases with the no. of bribes, then he may restrict supply and increase the level [which would be worse for growth].

This model suggests that corruption spreads because of competition between officials and consumers:

  1. Officials – if jobs are distributed by auction then an official not willing to take bribes once in office simply cannot afford to get the job.  Those who are willing to collect more once installed will pay more to get the job. Competition between officials for jobs ensures that maximal bribes are collected. [Thus policies that make accountable the awarding of government jobs should be a top priority.]
  2. If buyer A can get the government service more cheaply than B, then his business is at an advantage; A can outcompete B. Thus if A bribes the official then all other competitors must in order to stay in business. This is not relevant for the spread of corruption without theft. In other words, observance of the law cannot survive in a competitive environment. As corruption with theft more closely aligns the interests of the officials and the consumers it will be more pervasive and harder to eradicate. What is needed is a good accounting system to check on officials.

Industrial Organization of Corruption

    • The above model is most relevant to monarchies, dictatorships where it is always clear who should be bribed, and the bribe is distributed amongst the relevant bureaucrats and they do not return to ask for more. In reality the ability or willingness of agencies to collude in price setting will be relevant for determining the extent and level of corruption.

If two different agencies supply one of two different complimentary licences needed for a business. Possibilities:

  1. The agencies collude on price:   they take into account the cross price elasticity of demand for the goods. In other words agency one keeps the price of good 1 down in order to expand the demand for complementary good 2, and vice-versa.
  2. Agencies are independent: both agencies ignore the cost that raising prices has on the other agency, so they set higher bribes which diminishes demand for both and results in a lower aggregate level of bribe [and production]. This is the highest level of bribe, and indicates how growth retarding free entry into bribe collection can be (e.g. setting up a toll on a road).
  3. Both agencies can supply both goods: if a consumer is bribed he will simply go to the other official. The Bertrand model of competition suggests that this will tend to drive the price of each bribe down to zero. This effect can also occur simply by the threat of new entrants to the sale of government goods. This will tend to keep corruption to zero [meaning that the provision of goods should not be restricted to one agency alone.

Different Structures of Corruption

    • Collusion is more likely to be enforced when price cutting can be easily detected and punishment severe, so i.e. when the government has a strong policing machine such as the KGB. Also relevant is the size of the elite (smaller = better) i.e. oligarchies etc.  The flip side of this is that the state must be sufficiently strong to punish those who get greedy and ask above the agreed limit.
    • The weakness of the government in African states in part explains why this collusive activity is absent, it cannot enforce bribe collusion indicating that independent monopolist structure will dominate and have terrible consequences for development.
    • Huntington noted that as states transition toward democracy corruption usually increases. This could be explained by this model whereby the state loses its strong hold over the bureaucracy machine and the system of bribes, so new entrants mean multiple agencies now take bribes where previously it was only one. This is consistent with Africa after the colonial structure broke down.
    • Countries with more political competition, media etc. are less likely to try to maximise bribes [consistent with the findings in Ferraz and Finan as summarized this week.]
    • The model indicates the best method for solving corruption is to increase the competition between officials [perhaps not that relevant for high level corruption, see Tangri & Mwenda this week.] This is the idea behind decentralization, although this applies only to corruption with theft, for corruption without theft better accounting is needed.

Corruption and Secrecy

  • Corruption is detrimental to development [see Will Easterly summary]. Mauro finds that countries with higher corruption have lower levels of investment. The independent monopolist model has the potential to reduce output to zero.
  • The fact that corruption is illegal means that people go to great efforts to keep it secret. It is much easier to take bribes on some goods rather than others, and so allocation decisions can be distorted. Government officials will use their power to ensure that people substitute goods that are easier to take bribes on for other goods that may have improved efficiency and growth.
  • The social costs of misdirection, in any of the models, can vastly dwarf the value of the bribes themselves.
  • This may explain why many nations prefer to spend on big infrastructure and military budget items rather than health and education, as the level of and ease of receiving bribes in the former, make them much more attractive purchases.



C. Ferraz & F. Finan

NBER Working Paper 14937

A Summary


In a Nutshell

Variation in electoral systems is thought to explain differences in corruption practices, so electoral rules that enhance accountability should constrain the ability of politicians to be corrupt. The model developed by Tim Besley states that where politicians seek re-election incentives in a two period setting, they face incentives not be corrupt in the first period in order that they might be re-elected to the second period. The lack of re-election constraint in the second period likewise indicates that the incentive not be corrupt is absent. Thus the paper tests empirically the hypothesis that flows from this i.e. that there will be on average more corruption in the second terms of elected officials relative to first terms even when controlling for other factors that may affect corruption such as experience of the individual politician. Using data from municipal governments drawn from anti-corruption audits undertaken by the Brazilian central government, they find that mayors with re-election incentives are significantly less corrupt that mayors without such incentives. The effect of these incentives varies according to local institutional settings that govern information that is available to voters, the likelihood and consequences of detection, and how competitive the political environment is in that locality. In other words, electoral accountability acts as a powerful mechanism to align the actions of politicians with the preferences of voters.

Besley Model (2006)

  • A political agency model whereby voters decide whether to re-elect an official but are unable to observe his type or actions leading to an information asymmetry which can be exploited by the corrupt such that they pose as good politicians in period 1 in order to maximise rent-seeking possibilities in period 2.
  • Based on state of the world S, which is only revealed to the politician, not the voters, a politician can set policy E such that S=E in which case the voters get a payoff, V. Alternatively, the politician can set policy such that S≠E in which case the voters get a payoff of 0 and the politician receives a payoff of R. After the policy is set voters observe their payoff and re-elect accordingly. All politicians that set policy such that S=E are re-elected.
  • In the second period clean politicians set the policy such that S=E and corrupt politicians set policy such that S≠E and he gets his payoff. Thus the voters are better off re-electing only clean politicians so they want to maximise the likelihood that only non-corrupt politicians are elected in the second period.
  • In the first period clean politician behave in accordance with voter preferences. Corrupt politicians face a trade off: be corrupt today and don’t get re-elected, or be good today and get re-elected to reap the benefits from corruption in the second period. Thus they will pretend to be good politicians if the discounted present value payoff from period 2 is greater than the payoff receivable in period 1.
  • When faced with the possibility of re-election corrupt politicians have the incentive to reduce rent seeking in period 1 and provide more public goods. Rents, then will tend to be higher in the second period, absent this incentive, and this is the testable proposition of this paper.

The Setting and Data

  • Municipal governments in Brazil are responsible for a great amount of public good provision and it is funded by transfers from the central government.
  • There is widespread corruption: phantom firms, uncompetitive bids, over-invoicing etc.
  • The central government does random audits on municipal governments in order to expose such practices. The data are drawn from these reports.
  • Corruption is defined as the resources diverted for corrupt activities expressed as a fraction of the total amount transferred. Other studies use subjective measures, but this measure is somewhat objective (absent bribery of the auditors).


  • Y = corruption level, X = 1st term, + municipal characterises + mayoral characteristics.
  • Political ability and experience could affect both re-election and corruption. They control for this using an RDD specification i.e. by comparing elections where the incumbents just lost, or just won, this controls for unobserved characteristics. They also compare second term mayors with first term mayors that had previously been elected who would be as politically able.
  • To control for experience (i.e. learning-by-doing) they make the same comparison as above, but also compare second term mayors who then went on to national politics. Theory suggests that they will have similar concerns as first term mayors and will act accordingly (i.e. lower corruption) which is inconsistent with the story whereby corruption increases as leaning-by-doing increases.


  • The basic results are that 1st term mayors are associated with a 27% decline in corruption. This is impervious to controls added. The result is also consistent with other specifications such as the RDD specification and also to different definitions of corruption.
  • This indicates that mayors who still face the possibility of re-election engage in less corrupt activities than mayors who have a shorter political horizon.
  • Experience control: first term mayors previously elected do not have similar corruption levels compared with second term mayor, indicating that corruption is not driven by experience (i.e. having well established networks of corruption).
  • Future careers: politicians that go on to future roles nationally etc. have lower 5% lower levels of corruption in the second terms than other second term mayors.

Local Context

  • The presence of media outlets in the locality may reduce the ability of the politician to exploit the information asymmetry that lies at the heart of the agency model, as voters are more likely to observe the type of the mayor if he is exposed by the press. As the likelihood that a corrupt politician is discovered in period 1, corrupt politicians will be less likely to pool with clean politicians so discipline will be reduced (i.e. corruption in period 1 will increase as they try to extract as much rent as possible). Conversely it also means that the such politicians are less likely to survive into period 2 so corruption will decrease in the second period. Thus the difference in the two periods should be smaller with local media. This is confirmed in the results.
  • The cost of corruption should increase if there is a local prosecutor who is willing to punish those caught being corrupt. This reduces the benefits of future rent seeking. This increased corruption in period 1 and reduces it in period 2. i.e. the gap should be smaller. This is found to be the case.
  • If political support is such that the mayor enjoys much legislative support then he can afford to be less disciplined, so again the difference between periods should decrease. This is found to be the case. Municipalities with low competition exhibit no differential effect between first and second term mayors.


  • The findings support a political agency model where mayors with re-election incentives refrain from rent extraction in order to increase their likelihood of re-election.
  • Assuming that absent the re-election incentive 2nd term mayor behaved like first term mayors US$160m would have been misappropriated.
  • Re-election has both discipline and selection effects.