Bureaucratic competition and public corruption: Evidence from transition countries
Introduction
Corruption can be viewed as the inappropriate actions of an agent to further the agent's interests at the expense (monetary or otherwise) of the principal's. The World Bank views such corruption as occurring within the public sector when public officials misuse their office for private gain. Such corruption is treated by newspapers, NGOs, civil society leaders, etc. as one of the “the greatest obstacles to economic and social development” in many developing countries.1 Beginning with Mauro (1995), many empirical studies have found that corruption lowers economic growth or investment.2 A survey of this literature can be found in Svensson (2005) and Asieudu and Freeman (2009). Using household data from Liberia, Beekman et al. (2013) find that corruption could even lower economic activity by 50% at the community level. Corruption could raise uncertainty thereby lowering investment and lower tax revenues which could hamper government financed development projects but corruption could also exert indirect costs, making other institutions less effective. Private rights for some are presumably less secure if other agents can skirt the law by paying officials to look the other way. Uncertainty regarding institutions will also increase if corruption causes a greater degree of capriciousness among government officials. Lower tax revenue might not only deter development projects but also provide less funding for institutions such as courts and other institutions that could improve regulatory quality or government efficiency.3
Given the purported importance of corruption for economic outcomes, a related line of research considers the determinants of corruption. Treisman (2000) considers various historical, cultural, and economic factors to determine as to what extent they can explain the differing degrees of corruption across countries. Using panel data for Italian regions, Del Monte and Papagni (2007) report that political and cultural factors are more important than economic ones in determining degrees of corruption. Apergis et al. (2012) find that corruption is lower in the U.S. states that score higher in economic freedom indices. Pieroni and d'Agostino (2013) obtain similar results using firm-level data across countries as more government intervention accompanies higher corruption.
Others have considered whether the bureaucratic structure influences the level of corruption. Abbink (2004) reports that regular rotation of officials (so that the same officials do not persistently interact with the same potential bribers) reduces corruption. Van Rijckeghem and Weder (2002) examine to what extent corruption declines with increased wages for civil service workers. Others consider the degree of centralization of the bureaucracy. Rose-Ackerman (1978) argues that a decentralized regime would lower bribery as competition across government officials would bid down the amount of bribes. However, Shleifer and Vishny (1993) develop a model where firms must collect several licenses and permits from (potentially) several officials. If these officials do not coordinate, then a tragedy of the commons can result in that burdensome bribe payments could drive some firms out of business and thereby lower the pool from which to extract bribes. Because a single government official acting as a monopolist would incorporate this effect into his demand for a bribe, total bribe payments under the centralized bureaucratic structures would be lower than under the decentralized, competitive ones. Subsequent research has explored these ideas more fully. Blackburn and Forgues-Puccio (2009) create a model where firms need several licenses to operate. They find that coordination among officials lowers the total amount of bribes and so is less harmful to growth.4 Drugov (2010) also considers firm behavior under centralized and decentralized bureaucracies. He finds that greater bureaucratic centralization achieves a better ex post allocation of licenses due to the reasons outlined above.
Given conflicting views on the association between the structure of the bureaucracy and the total amount of bribe payments, empirical examinations are also necessary. Unfortunately, little has been done due to a general unavailability of data on bureaucratic structure. Campos et al. (1999) investigate the role of predictability of corruption on investment. They find that the effect of corruption upon investment is less negative when firms a priori know the amount of the bribe. Presumably, centralized regimes are more predictable than under a decentralized bureaucracy where firms interact with numerous officials.5 Olken and Barron (2009) examine trucking in Aceh in Indonesia where drivers must pay bribes at checkpoints along the route. They find evidence that total bribe payments were greater under decentralized structures.6
This paper considers whether the level of bribes that firms pay is higher when they report greater centralization among government bureaucrats. We use a dataset constructed by the World Bank in cooperation with the European Bank of Reconstruction and Development. The 1999 Business Environment and Enterprise Performance Survey (BEEPS) spans 4100 firms across 24 post-communist countries and Turkey.7 Not only do they ask firms about the extent of their bribe payments, they also delve further into the types of interactions that firms have with government officials, including how likely firms believe that subsequent bribes will follow initial ones. We find that firms report lower bribe payments under more centralized bureaucratic structures. We also find that this result holds across different purposes for what the bribe is used (avoiding taxes, securing government contracts, etc.) and across different bribe environments such as the extent to which bribes are predictable and the degree to which government regulations are viewed as obstacles by the firm.
We find this sample extremely useful as problems of corruption could be of particular interest to these former communist countries. Hillman and Schnytzer (1986) describe rampant corruption within the Soviet Union. Bribery occurred throughout supply chains and bribes were also employed to procure government offices. Even political purges were a tool used to obtain or protect rents by removing rivals. Boettke (2001) describes Soviet communism as analogous to mercantile systems centuries ago where kings would gain revenues by selling monopoly rights to suppliers. Boettke argues that the move away from a market economy allowed the government to extract rents by limiting competition. Corruption then allowed leaders to extract the surplus from the few suppliers. Such high levels of corruption could also be self-reinforcing. Dabla-Norris (2002) develops a model that allows for strategic complementarities as officials are more likely to be corrupt when other officials behave similarly. Charap and Harm (2002) argue that such kleptocratic states will design bureaucratic structures so as to maximize the degree of rent that can be extracted by government officials. Although Boettke (2001) and Hillman and Schnytzer (1986) focus upon the Soviet system, such systems are unlikely to have completely changed following the fall of communism, especially within the same decade as to when the survey that we employ was conducted. Bayar (2011) finds corruption to be persistent over time. Vachudova (2009) describes corruption in the European Union's post-communist members, suggesting that such environments survived the fall of communism. Therefore, corruption has been a longstanding issue for these countries and remains an ongoing one.8
The rest of the paper is organized as follows. Section 2 considers in greater detail the association between bureaucratic competition and bribe payments. Section 3 describes our empirical methodology, including the BEEPS survey. Results are given in 4 Results, 5 Conclusion concludes the paper.
Section snippets
Background
Rose-Ackerman (1978) was one of the first to invoke bureaucratic competition as a possible remedy to corruption. Considering a model which allows clients seeking government services to reapply to another official when a bureaucrat demands a bribe, she shows that competition between a few honest and potentially many corrupt bureaucrats will reduce the amount of bribe and eventually make corruption disappear. The model suggests that competition among government officials in delivering public
Empirical methodology
The first part of this section provides the source of the data. The next part outlines the empirical model and describes the variables within the model in greater detail. The final part discusses the potential weaknesses of our approach.
Results
Table 3 presents the baseline results in panel A. The first column provides coefficient estimates from Eq. (1) given by interval regression.
Bribes increase with the time that representatives of the firm spend with government officials. This result could arise because more time with government officials could proxy for more onerous regulations leading to more bribery in hopes to circumvent these regulations. A greater time with government officials might also indicate that greater uncertainty
Conclusion
Bureaucratic structure has been suggested as an influencing factor of the level of corruption although theory does not agree upon the direction of the effect. Some argue that bribe payments are higher in decentralized systems whereas other models predict that centralized systems lower total bribe payments. In this paper we use cross-country firm level survey data to investigate the effect of bureaucratic centralization upon corruption.
Our analysis suggests that the amount of bribe paid by firms
Acknowledgments
We would like to thank the two anonymous referees, the editor, and numerous seminar participants at Southern Illinois University for their suggestions while absolving them for any possible errors.
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