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On Corruption

by Can ErbilSummer 2007

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CPI 2006

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From "A Corruption Primer: An Overview of Concepts in the Corruption Literature" by Thomas and Meagher, 2004

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Selected Papers

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"What Determines Corruption? International

Evidence from Micro Data," by Naci Mocan, 2004 This paper utilizes a micro-level data set from 49 countries to address three issues: What determines corruption at

the individual level? What determines the perception of the extent of corruption in the country? Does corruption have

a direct impact on growth when the quality of the institutions are controlled for? In addition, the paper creates a direct

measure of corruption which portrays the extent of corruption as revealed by individuals who live in those countries.

The results show that both personal and country characteristics determine the risk of exposure to bribery. Examples

are gender, wealth, education, marital status, the city size, the legal origin of the country, the existence of

uninterrupted democracy, a war between 1960s and 1980s, and the strength of the institutions in the country

(measured by the risk of expropriation).

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"What Determines Corruption? International

Evidence from Micro Data," by Naci Mocan, 2004 The second part of the paper shows that controlling for endogeneity of corruption and institutional quality, actual

corruption in the country and the proportion of the bribes asked by various government agencies have no direct impact on

corruption perception. On the other hand, an improvement in the quality of institutions lowers the perception of corruption.

The final section of the paper shows that controlling for the quality of the institutions, corruption does not have a direct

impact on growth. Keeping constant the geographical location of the country, the legal origin, religious composition, the

presence of a war, the federal status, initial education and income as well as the extent of corruption in the country, a one-

half standard deviation increase in the quality of institutions (e.g. from the level of Indonesia to the level of India),

generates an additional 0.7 percentage point increase in the average annual per capita GDP growth.

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Corrupt Governments Receive no less Foreign Aid "Based on some measures of corruption - the more corrupt the government is, the

more aid it actually receives." International programs to alleviate poverty include bilateral aid from rich countries to

poor countries, multilateral aid from international organizations, grants below market interest rates, technical assistance, and debt forgiveness programs, such as the World Bank/IMF's Highly Indebted Poor Country initiative. The World Bank, in particular, increasingly has focused in its aid programs on issues of good governance, and on the level of corruption among the politicians and bureaucrats of countries that receive aid.

Critics of foreign aid programs argue that aid often supports corrupt governments and inefficient bureaucracies. Supporters of foreign aid programs, on the other hand, argue that aid not only can help to reduce poverty but also is a way of rewarding good policies and honest government. A crucial question is therefore whether good governments receive more foreign aid than corrupt governments. An NBER Working Paper by Alberto Alesina and Beatrice Weder shows instead that corrupt governments receive as much aid as honest ones.

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In Do Corrupt Governments Receive Less Foreign Aid? (NBER Working Paper No. 7108), Alesina and Weder find that - based on some measures of corruption - the more corrupt the government is, the more aid it actually receives. According to no measures of corruption that they use do less corrupt governments receive more aid. Also, they conclude that there is no evidence that an increase in foreign aid reduces corruption.

In terms of bilateral donors, the researchers find that Scandinavian countries (the most generous in per capital terms) give more aid to less corrupt governments; Australia also gives less aid to countries with high levels of corruption. The United States, in contrast, stands out for giving more aid to more corrupt governments, other things equal.

Corrupt Governments Receive no less Foreign Aid

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The question of whether increased aid leads to increased corruption is the most difficult to answer, Alesina and Weder find. Data on corruption are not only imperfect by their nature, but only have been collected for a large number of countries in recent years. This makes it difficult to measure changes in the level of corruption following changes in the flow of aid. While warning that the results need to be treated with caution, the researchers find evidence of a weak "voracity effect" of foreign aid, meaning that countries that receive more aid tend to have higher levels of corruption. They find no evidence that foreign aid reduces corruption levels in recipient countries.

Alesina and Weder also show that the private sector pays significantly more attention to corruption than official donors do. Foreign direct investment (FDI) flows behave differently from aid flows, because of the negative effects of corruption on investment. A low level of corruption is by no means the most important determinant of FDI flows. But these researchers conclude that, when it comes to corruption, the private sector is significantly more discriminating than official donors.

[from NBER website]

Corrupt Governments Receive no less Foreign Aid

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"Cultures of Corruption: Evidence From Diplomatic Parking

Tickets," by Fisman and Miquel, June 2006 Corruption is believed to be a major factor impeding economic development, but the importance of legal enforcement versus

cultural norms in controlling corruption is poorly understood. To disentangle these two factors, we exploit a natural experiment, the

stationing of thousands of diplomats from around the world in New York City. Diplomatic immunity means there was essentially

zero legal enforcement of diplomatic parking violations, allowing us to examine the role of cultural norms alone. This generates a

revealed preference measure of government officials' corruption based on real-world behavior taking place in the same setting.

We find strong persistence in corruption norms: diplomats from high corruption countries (based on existing survey-based indices)

have significantly more parking violations, and these differences persist over time. In a second main result, officials from countries

that survey evidence indicates have less favorable popular views of the United States commit significantly more parking violations,

providing non-laboratory evidence on sentiment in economic decision-making. Taken together, factors other than legal

enforcement appear to be important determinants of corruption.

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Does Corruption Produce Unsafe Drivers?Marianne Bertrand, Simeon Djankov, Rema Hanna, Sendhil Mullainathan, June 2006

We follow 822 applicants through the process of obtaining a driver’s license in New Delhi, India. To understand how the bureaucracy responds to individual and social

needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial

reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise driving

test after participants had obtained their licenses. Several interesting facts regarding corruption emerge.

First, the bureaucracy responds to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate.

Second, the bureaucracy is insensitive to social needs. The bonus group does not learn to drive safely in order to obtain their license: in fact, 69% of them were rated

as “failures” on the independent driving test. Those in the lesson group, despite superior driving skills, are only slightly more likely to obtain a license than the

comparison group and far less likely (by 29 percentage points) than the bonus group.

Detailed surveys allow us to document the mechanisms of corruption. We find that bureaucrats arbitrarily fail drivers at a high rate during the driving exam, irrespective

of their ability to drive. To overcome this, individuals pay informal “agents” to bribe the bureaucrat and avoid taking the exam altogether. An audit study of agents

further highlights the insensitivity of agents’ pricing to driving skills.

Together, these results suggest that bureaucrats raise red tape to extract bribes and that this corruption undermines the very purpose of regulation.

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"Corruption Perceptions vs. Corruption Reality," by

Olken, August 2006 This paper examines the accuracy of beliefs about corruption, using data from Indonesian

villages. Specifically, I compare villagers’ stated beliefs about the likelihood of corruption in a

road-building project in their village with a more objective measure of ‘missing expenditures’ in

the project, which I construct by comparing the projects’ official expenditure reports with an

independent estimate of the prices and quantities of inputs used in construction. I find that

villagers’ beliefs do contain information about corruption in the road project, and that villagers

are sophisticated enough to distinguish between corruption in the road project and other types

of corruption in the village. The magnitude of their information, however, is small, in part

because officials hide corruption where it is hardest for villagers to detect. This may limit the

effectiveness of grass-roots monitoring of local officials. I also find evidence of systematic

biases in corruption beliefs, particularly when examining the relationship between corruption

and variables correlated with trust. For example, ethnically heterogeneous villages have higher

perceived corruption levels but lower actual levels of missing expenditures. The findings

illustrate the limitations of relying solely on corruption perceptions, whether in designing anti-

corruption policies or in conducting empirical research on corruption.

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More Selected Papers