Legal Corruption. Daniel Kaufmann Pedro C. Vicente. Oxford University November 9, 2005

Transcription

1 Legal Corruption Daniel Kaufmann Pedro C. Vicente Oxford University November 9, 2005

2 Conventional Definition of Corruption Abuse (usually taken as an illegal act) of public office (a public-sector centered definition) for private gain.

3 But what about A private individual buying a law (legal in a number of countries, through allowed lobbying), or A private-sector firm employing a wellknown former politician to its advisory council.

4 Question of the Paper Challenge conventional definition of corruption, instead positing a broader notion to understand What are the main simple determinants of the world pattern of legal and illegal corruption Original political economy model of corruption, presenting a simple explanation Use of broad range of different empirical counterparts for testing, namely Newly available empirical measures of legal corruption, from a worldwide firms survey in 104 countries Other external data sources

5 The Model Infinitely repeated complete information game 3 agents with individual ability a Every period an auction of a favor takes place Initial auctioneer is pre-defined Winner is next period auctioneer Bidders submit contract offers Auctioneer raises a at a given period; others raise 0 (let s call the loser population)

6 Corruption Date 0 Date 1 Date 2 Date 3 Auctioneer Bidders Auctioneer Bidders Auctioneer Bidders Auctioneer Bidders

7 Auctioneer may choose to buy Legal Barriers (proportion ϖ of transferred earnings) Legal Barriers inflict myopia on the loser, i.e. her utility horizon is the present period (collective action undermined) Population may start an insurrection at the end of period Insurrection is successful if λ(.)> λ ; o/w prob. ε λ(.) function depending on: General ability a (idea: potential for destruction) Raised amounts α by pop in last 3 periods (idea: potential to arm an army by pop)

8 Stage Game Bidders Submit Contract Offers Auctioneer Decides Winner Auctioneer Decides Whether to Build Legal Barriers Population Decides for Insurrection or Peace Time Line (Stage Game)

9 Payoffs: For all agents: i i, where w e is t 0 end-of-period wealth e b w = w + τ + a ϖ For the Auctioneer: For the Winner: w e w e b For the Loser: w = w Contract Incompleteness (CI): = [ δ t (1 = b in the sense that (1-s) cannot be negotiated it has to be consumed +τ s ) w e ]

10 Equilibrium Inequality high (1/α) / Ability (a) low Insurrections started, corruption, no legal barriers (unstable) Intuition: CI=>power is best; pop almost (unstable) no threat; Inequality low / Ability high Accountability (ϖ) low No Insurrections started, corruption, legal barriers (unstable?) Intuition: pop is threat; worth spending ϖ; inequality increases (possible instability in the long run) Accountability (ϖ) high No Insurrections started, no corruption, no legal barriers (stable) Intuition: pop threat, legal barriers too expensive; pop offered insurrection payoff=>rotation of all agents (stable)

11 Testable Implications Table 1: Exogenous Ability (Productivity) /Equality Low High Accountability Low High Low High Legal Corruption No No Yes No Endogenous Illegal Corruption Yes Yes No No Insurrections Yes Yes No No Three patterns of interaction of exogenous vs. endogenous variables

12 Data New Dataset with proxies for Legal Corruption: Executive Opinion Survey (EOS) Global Competitiveness Report , World Economic Forum mail-based survey, 8729 firms, 104 countries Broad range of proxies for other variables (both from EOS and other databases)

13 Endogenous Variables Illegal Corruption: EOS Financial Honesty of Politicians EOS Frequency of Illegal Political Contributions EOS Frequency of Diversion of Public Funds Due to Corruption EOS Frequency of Bribery as State Capture KKM Control of Corruption (2002) Legal Corruption: EOS Favoritism in Policy and Procurement EOS Frequency of Legal Political Contributions EOS Influence in Laws and Regulations» Adjust by Rule of Law: EOS Frequency of Bribery in Judicial Decisions and KKM Rule of Law (2002) Insurrections: EOS Common Crime ijet Risk of Travel (2004) EIU - Armed Conflict, Violent Demonstrations, Violent Crime, Social Unrest (2003) Civil War Dummy - constructed from Gleditsch et al, 2001 ( )

14 Parameters (Exogenous Variables) Ability (Productivity): Lagged loggdp per capita (1984) Equality: 100-Gini Coefficient (2002) EOS Equality in Healthcare Accountability: EOS Freedom of Press Freedom House:» Civil Liberties (2003)» Press Freedom (2004) KKM Voice and Accountability (2002) Government Fractionalization (2000) from DPI - Database of Political Institutions, Beck et al, 2001

15 Simple Empirical Tests: Averages

16 From first two rows in Table 1 differences lower-upper quartiles/halves in terms of income p/c or equality higher for illegal corruption than for legal corruption From third row in Table 1 Insurrection proxies are higher in lower income p/c or equality groups of countries Note that differences are higher using 1 st vs. other quartiles than using halves we focus on the first

17 Simple Empirical Tests: Correlations

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21 From first two rows and first three columns in Table 1 If we take differences legal-illegal corruption and take out lowest legal corruption countries Clear positive correlations across countries should arise with income p/c and equality From third row in Table 1 Clear negative correlations should arise with income p/c and equality

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24 From first row in Table 1 If we take legal corruption vs. accountability: Clear negative correlations should arise for high income p/c or equality first quartiles Over all countries, we should see higher correlations (in the sense of less negative)

25 (3) * * (2) * * (1) * * DEQUAL odacc DGDP ndacc mdacc ldequal kdgdp i INSURR DEQUAL jdacc DGDP idacc hdacc gdequal fdgdp i IK DEQUAL edacc DGDP ddacc cdacc bdequal adgdp i LK = = = Restrictions on coefficients: Eq(1): Eq(2): Eq(3): + + = 0 e d c b a = j i h g f = o n m l k Eq(1) - Legal corruption proxies: we take diffs to illegal corruption and lack of rule of law An Econometric Model for Testing

26 Equation (1) - Legal Corruption (using differences) Choice of Empirical Measures Explanatory Variables Dependent Variable > Accountability Equality Legal Corruption (Difference) DGDP DEQUAL DACC DGDPDACC DEQUALDACC EOS Legal Corruption Adjustment Number of Observations R2Adjusted Fit (Testable Implications) EOS Q5.12E EOS Q4.12 EOS Q5.12G KKMRL Legal Corruption Freedom of Press EOS Q5.06 Gini KKMCC EOS Q5.12G EOS Q4.14 KKMRL KKMCC EOS Q5.12G EOS Q5.14D KKMRL KKMCC coef. 0.55** 0.88** 0.13* ** std. err coef. 0.34* 1.05*** 0.31*** 0.30*** 1.01** 0.26*** 0.25*** 0.67** 0.16** 0.15* std. err coef std. err coef. std. err. coef ** -0.35*** -0.36*** -1.30* -0.33** -0.34** std. err OK EXACT EXACT EXACT EXACT EXACT EXACT +- OK +- OK +- OK Notes: All regressions have GDP as GDP pc 1984; dummies take value 1 for the first quartile of the corresponding variable. *, **, ***, correspond to the levesl of statistical significance 10%, 5%, and 1%, respectively.

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29 Equation (2) - Illegal Corruption Choice of Empirical Measures Explanatory Variables Dependent Variable > Accountability Equality Illegal Corruption Freedom of Press EOS Q5.06 Gini Illegal Corruption EOS Q4.02 EOS Q4.13 EOS EOS EOS Q5.11 Q5.12E Q5.12F DGDP DEQUAL DACC DGDPDACC DEQUALDACC coef *** -1.24** -1.26*** -1.00* -1.44*** -1.23*** -0.96*** std. err coef. coef. coef. coef * * *** ** ** std. err. std. err. std. err. std. err Number of Observations R2Adjusted Fit (Testable Implications) EXACT EXACT - OK Notes: All regressions have GDP as GDP pc 1984; dummies take value 1 for the first quartile of the corresponding variable. *, **, ***, correspond to the levesl of statistical significance 10%, 5%, and 1%, respectively.

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31 Equation (3) - Insurrections Choice of Empirical Measures Explan. Variables Dep. Variable --> Accountability Equality Insurrections Freedom of Press EOS Q5.06 Gini Insurrections EOS EIU EIU EIU ijet EIU 3003 Q DGDP DEQUAL DACC DGDPDACC DEQUALDACC coef *** -1.46*** -0.98*** * -0.73* * std. err coef. 0.11* -0.33* -0.39* -0.94*** -0.73*** -0.90*** -0.79*** std. err coef. coef. coef * ** -0.67* * std. err. std. err. std. err Nr. of Observations R2Adjusted Fit (Test. Imp.) EXACT - OK EXACT EXACT - OK - OK EXACT - OK Notes: All regressions have GDP as GDP pc 1984; dummies take value 1 for the first quartile of the corresponding variable. *, **, ***, correspond to the levesl of statistical significance 10%, 5%, and 1%, respectively.

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33 Some accounting: Main Findings Eq(1): 14 EXACT, 51 OK (exc. EXACT), out of 100 Eq(2): 17 EXACT, 19 OK, out of 50 Eq(3): 22 EXACT, 38 OK, out of 60 Eq(1): Eq(2): Eq(3): Favoritism in Procurement and Legal Political Contributions; Gini; Freedom of Press All except Diversion of Public Funds Due to Corruption; DPI Fractionalization of Government EOS Common Crime; DPI Fractionalization of Gov

34 Concluding Remarks Simple model to explain basic pattern of legal/illegal corruption General notion of corruption, founded at the micro level Income/equality determine basic political threat Accountability determines ability to undermine collective action by population General validity of the model from testing with wide range of empirical measures for the relevant concepts Newly available legal corruption measures Possible Policy Messages: It takes two to tango We may be forgetting that some high income (namely G7) countries have high (legal) corruption Accountability: may be key in determining development