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The author is grateful to Alberto Alesina, Tito Cordella, Edward Glaeser, Hélène Rey, Andrei Shleifer, Enrico Spolaore, Aaron Tornell, and Yishay Yafeh for helpful comments.
Similarly, political scientists have long recognized that economic variables affect institutional performance (Hibbs, 1973).
A web guide and access point to many publications regarding the IMF’s approach to promoting good governance and other policy initiatives (including the OECD Convention) is available at http://www.imf.org/external/np/gov/guide/eng/index.htm
Wade (1982) provides a classic description of a bureaucracy in which corruption was systemic and bribes were shared among various civil servants at all levels in the hierarchy.
Andvig and Moene (1990) explore the implications of the assumption that the probability a corrupt official will be reported to higher authorities is a decreasing function of the proportion of his colleagues who are also corrupt. Tirole (1996) analyzes the interaction between the reputation of a group and its individual members. As an individual’s actions cannot be perfectly observed, their reputations depend partly on the past behavior of the group to which they belong. Individuals who belong to a group with a bad reputation for being corrupt will therefore have a strong incentive to be corrupt too. This perpetuates corruption within a group. Sah (1991) explains differences in crime participation rates across otherwise similar societal groups on the basis of a learning model in which it is easier to observe members of one’s own group. See also Cadot (1987), Dawid and Feichtinger (1996), and Huang and Wu (1994).
Putnam (1993) defines “civicness” as the extent to which citizens cooperate rather than free-ride, and interact as equals rather than as patrons and clients. He measures “civicness” as a composite index of objective measures such as the number of recreational and cultural associations. He finds this index to be significantly associated with both bureaucratic efficiency and income levels.
More generally, this is an illustration of how various aspects of institutional inefficiency (in this case, corruption and political instability) are mutually reinforcing. This has already been emphasized by Krueger (1993) and De Soto (1989) with respect to corruption and red tape: they argue that corrupt bureaucrats will intentionally introduce new regulations and red tape in order to be able to extract more bribes by threatening to deny permits.
This is somewhat analogous to the question of whether collusion is sustainable among firms facing a given demand curve, which has been thoroughly investigated in the industrial organization literature. In that setting, individual firms trade off long-term benefits from joint monopoly pricing against short-term benefits obtained by deviating and capturing the whole market for one period. The spirit of the present analysis is somewhat related to the industrial organization of different corruption systems as in Shleifer and Vishny (1993).
Throughout this paper “a country is more likely to end up in a bad equilibrium” is used as shorthand for “there is a larger set of parameters for which the country ends up in the bad equilibrium.”
This analysis ignores congestion effects in the theft technology. One might argue that the marginal product of rent-seeking ought to be lower, the higher the total amount of theft activity, as the amount of G available for each rent-seeker to steal falls when everybody is stealing from G. As long as this effect becomes predominant only at high levels of total theft activity, one may conjecture that the qualitative results of the present analysis would not be affected.
It is assumed that
Barro (1990) shows that it is optimal for the government to set government expenditure to be a constant proportion of output.
The welfare of the representative consumer is monotonic in the growth rate. The expression for welfare can be rearranged so that l affects it only through the growth rate. The proof is the same as for the Barro (1990) model. Thus, higher L unambiguously implies higher welfare.
It can be shown that the growth rate would be a monotonically positive function of L even if the investment rate were exogenously given and constant, because L affects positively the Y/K ratio through mechanisms (a) and (b).
Any corner solution is stable. L=0 (where everybody would be dead anyway) is not an equilibrium, because at that point the wage is extremely high, and higher than the marginal product of rent-seeking, so that people would wish to increase their supply of productive work.
It is assumed that, owing to convex adjustment costs, people can alter their levels of work versus rent-seeking activity only gradually. Therefore, were there to be a change in the total amount of theft activity, individuals would not be able to jump to L=0 or L=1 immediately. In a deterministic model such as the present one, these adjustment costs do not affect the maximization problem.
Real internal solutions exist iff (a + b)2 – 4bα(1 – τ)/τ ≥ 0.
The model could be extended to analyze the problem of a government choosing the amount of productive expenditure and the amount of expenditure devoted to protecting property rights (e.g. public expenditure on the police force).
All comparative static exercises in this paper are essentially based upon taking simple derivatives. They are omitted for the sake of brevity but are available upon request.
According to the New York Times (November 8, 1992, sec. 6, pg. 31), the administration of former Brazilian president Fernando Collor de Mello, described as a highly complex and efficient system of corruption, “they established goals: by month x, we are going to net $500 million.” According to Wade (1982), each level of the hierarchy in the administration of the irrigation system in South India obtained a fixed percentage of the total bribe. Together with the systematic evidence on the persistence of institutional efficiency, these examples suggest that once a corruption machine is set up, it takes time to change the way it operates.
When a given politician amasses a fortune (by levying τM or more), citizens will realize that this individual is corrupt. According to the New York Times (November 8, 1992), former President Collor’s acquisition of a palatial residence triggered a corruption scandal in Brazil (which culminated in Collor’s impeachment).
Many international institutions and nongovernmental organizations (NGOs) have emphasized the importance of transparency in the fiscal and monetary accounts, and in the conduct of business more generally. See again the IMF’s web site. A partial listing of NGOs that have been active in this area includes Transparency International and recent initiatives by Global Witness and Mr. George Soros encouraging multinational corporations (notably oil and other natural resource companies) to publish how much they pay in royalties, taxes, and fees to each country they deal with. While in the model τM is the highest bribe rate an individual politician can get away with, it is likely that this bribe rate would be reduced by policies aimed at improving transparency more generally.
The politicians are assumed to have an endowment in the second period so that their marginal utility of consumption would not be infinite, were they to be ousted. One could assume that both citizens and politicians obtain an endowment (possibly the same) in both periods. The current formulation is chosen merely so as to simplify notation.
Under certain extreme conditions, politician i would be able to save the government from collapsing by accepting a bribe lower than λ/N, and still be better off than by levying τM. However, this would not be a symmetric equilibrium.
One could think of writing down another version of this model as an infinitely repeated game. Each individual politician decides what bribe rate to levy. At the same time, the citizens decide whether or not to oust the government. There will be an efficiency loss for a few periods if the government collapses. There will be a bad equilibrium, but also a good equilibrium in which the politicians adopt a “trigger” strategy: they levy the cooperative-level bribe, as long as all other politicians have done the same in the past; citizens reelect the government.