He was a pirate with a tremendous and sanguinary history; and as long as he preserved unspotted, in his retirement, the dignity of his name […] homage and reverence were with him high and low; but when at last he descended into politics and became a paltry alderman, the public “shook” him, and turned aside and wept. When he died […] little by little he has come into respect again; but it is the respect for the pirate, not the alderman.Mark Twain, Life on the Mississippi.
Appendix: Proofs of Propositions
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)| false ( Tanzi, Vito; and Davoodi, Hamid R. 1998) “ Corruption, Public Investment and Growth,” in: ( Shibata, Hirofumi; and Ihori, Toshihiro eds.) The Welfare State, Public investment, and Growth: Selected Papers from the 53rd Congress of the International Institute of Public Finance, Tokyo, Springer-Verlag, pp. 41– 60.
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I am grateful to Reza Baqir Amrita Dhillon, Domenico Fanizza, Clive Fraser, Giovanni Ganelli, Carlo Perroni, Peter Sinclair, and participants at a seminar at the INS Institute for comments and suggestions, and to Estefanía Fallas and Margaret Griggs for their valuable editorial help. Any remaining errors are my responsibility.
The word “roads” is used only to simplify the narrative. In reality, roads are not “pure” public goods, they are excludable (through tolls) and subject to congestion. Nevertheless, they are frequently built by private contractors and then transferred to the government for public use by all citizens: and can be supplied in different amounts.
The network of roads, for instance, can vary in extension and coverage, but it is open to all users in its entirety. Each potential user benefits to some extent from the whole extension of the road network even if he uses only part of it.
In addition, income is exogenous, inelastic to the tax rate, and unaffected by the consumption of either type of goods. This situation may apply, for instance, to a comparatively small province of a federal state, where the income of citizens depends on country-wide macroeconomic conditions and is not affected by the fiscal policy of the provincial government (which is constrained to run a balanced budget). In more general situations, the decisions concerning the allocation of resources between private and public consumption would have an impact on production, employment and income, and the effects of corruption should be analyzed in a model of general equilibrium.
Different utility functions have been applied in the literature on spatial voting, depending on the type of problem being analyzed. For the purposes of this study, the quasilinear specification provides a good balance of tractability and generality.
Most of the ensuing discussion can be simplified by normalizing n to unity. That n is larger than 1 becomes relevant when discussing the decision problem of an elected candidate (see Subsection III.A below).
In the literature on spatial voting, ideal policies are sometimes called “ideal points.”
Since V(g; θ) is concave in g, the ideal policy of each citizen is unique.
This assumption becomes relevant when corruption is introduced, since corruption may induce the owners of the entreprises to support a larger road supply. In general, if the entrepreneurs have the right to vote, corruption alters the distribution of preferences. To the purposes of this study, this effect can be ignored.
This assumption allows to put in evidence the specific aspects related to the minister’s incentives to expand public expenditure. In real life, the lobbying activity of special-interest groups interacts with the factors analyzed here and affects the equilibrium outcome.
Similar assumptions are found in the “citizen-candidate” models of political equilibrium (for instance, Osborne and Slivinski, 1996; Besley and Coate, 1997). In our model, however, citizens do not have to register, and do not incur costs, to stand as a candidate; each citizen can vote for any citizen, including himself, who is thus a candidate “by default.”
This simplifying assumption approximates the equilibrium outcome that occurs, under some circumstances, with various electoral systems. With plurality voting, for instance, when the costs of standing as a candidate are sufficiently low, equilibria with a single candidate or with candidates having the same policy preferences are equivalent to the equilibrium outcome that would result in an infinite sequence of pairwise contests (Osborne and Slivinski, 1996). With majority voting, a representative assembly reflecting the policy composition of its electorate would tend, on average, to elect a government whose policy preferences are equivalent to those of a single candidate that survives infinite pairwise contests. The equilibrium outcome of particular electoral systems may of course be different, but its analysis exudes from the scope of this paper.
Although the singular is used to simplify the narrative in the rest of this paper, in general there may be more than one “median voter” (all with the same preferences). In such cases, the identity of the winner among the set of median voters will be decided by extrapolitical criteria such as random extraction, seniority, or educational qualifications. These aspects are not relevant for the present discussion.
When the policy choice is unidimensional and preferences are single-peaked (as occurs as a result of the concavity of the indirect utility function V(g;θ)), the median voter is pivotal. The only Condorcet winners are therefore candidates who implement his ideal policy. Since each candidate, once elected, implements his own ideal policy, the Condorcet winner in the absence of corruption can only be the median voter himself. With corruption, as discussed below, the ideal policy of the elected candidate differs from that of a nonelected citizen of the same type, and the median voter ceases to be the Condorcet winner.
This assumption ensures that the enterprises are not acting as an interest group to alter the allocation of resources in a particular direction. This assumption allows us to focus on how corruption alters the electoral choice of the voters. Some studies (Basu et al., 1992; Besley and McLaren, 1993; Mookherjee and Png, 1995) assume that the rent is shared between the agents that pay and receive the bribe according to the Nash bargaining solution.
In alternative, one could assume that a fraction 1 – a of the price increase is retained by the enterprises so that the minister only receives a bribe of amount ab for each mile of roads (as in a Nash bargaining model). As mentioned above, however, this would give the enterprises a stake in corruption, making them a potentially influential interest group.
This assumption simplifies the analysis by making the value of the bribe independent from the risk of detection. In alternative, one could assume that the enterprise also runs a positive risk of punishment π‘, in which case the value of the bribe determined below would be equal to p – 1 – π’.
A necessary condition for corruption to be profitable for the minister is that a > 1/n, which assures that the gross gains from corruption, abg, are larger than the additional tax burden arising from an inflated price of the public good, bg/n. This condition is easily satisfied for sufficiently large values of n. This seems to suggest that corruption should ceteris paribus be less frequent in small countries and that, when it occurs, it would involve larger bribes. However, the minister in a large country may also be able to retain a smaller share of the rent. Note that this condition would not be satisfied with n = 1; the requirement n > 1 has thus become relevant.
π could also measure the amount of consumer goods spent by the minister ex ante to purchase insurance against the risk of punishment.
Note, too, that VC(g,b; θ) < V(g; θ) for all θ and for all values of g: other things being equal. Nonelected citizens suffer from the presence of corruption because they pay more taxes for equal amounts of roads. As discussed below, however, in equilibrium “other things” are not equal: the citizens vote for a different candidate that sets a lower value of g.
Notice that Ψ (θ) > 0: by definition of
since θu ′(gθ) = 1/n and
The fact that citizens are perfectly informed of which candidates are corrupt, and that, in spite of this, corruption is not always punished should not sound surprising. Citizens may be unable to prosecute their representatives even when they know that they are acting corruptly, for instance because the evidence available to the general public is not sufficient to secure a court conviction.
All candidates are corrupt if and only if
The words “right” and “left” are not used here in their usual political connotation but only to highlight the ordering of citizens’ preferences by type. Left-wing political parties frequently exhibit a comparatively strong preference for public goods, and right-wing parties are more inclined to reduce taxes, but there are exceptions (the political right, for instance, might spend more than the left on national security, a particular example of public good).
A corrupt candidate of generic type c ∈ C(π) would set
In this paper, “law enforcement” only refers to the enforcement of rules prohibiting corruption. There is, of course, a large area of law enforcement that is not related to corruption, that is not discussed here.
Similar considerations may apply more generally to all institutional decisions bearing long-term effects on future policy choices. The shift toward central bank independence has been explained, for instance, on the basis of long-term electoral interests of elected politicians (Bernhard, 2002; McGregor, 2007).
This is, of course, a simplified representation of the process. In most cases (the founding of a new country being a rare exception), the institutional environment is not set once and for all at a separate constitutional stage, but evolves through a gradual and ongoing process of institutional innovation and reform.
We assume that the number of citizens is the same in both states: in the conservative state, the preferences of the citizens that enter the community at the political stage are distributed like those of the citizens that are already present at the constitutional stage.
Since dgo/dpo< 0 f o po> 1, a sufficient condition for this derivative to be positive in the interval (1, p*) is that u″ ′(g) ≤ 0 for all g. When this occurs, dg°/dθ is larger when the minister is honest (po =1) than when he is corrupt (po =p* < 1).
Sincep > p*, given that
Since the political median voter is always elected when he is honest, the hypothetical case in which πB> πμ is irrelevant. Given that the political median voter always prefers an honest citizen of his type to a corrupt citizen of his type, then πA< πμ implies πB< πμ.
which is positive when γ ≡ θ*(π) < μ.
πC is always larger than πB because, when π > πC, the PMV prefers an honest candidate of type θ*(π) to a corrupt candidate of type α while, when π < πB, he prefers a corrupt candidate of type θ*(π) to an honest candidate of the same type. Since, by definition, the PMV prefers a corrupt candidate of type α to a corrupt candidate of any other type, πB cannot be larger than πC. The case in which πA> πC> πB is less interesting: the PMV prefers either an honest candidate of type θ*(π) (if π > πC) or a corrupt candidate of type α (if π < πC). As discussed below, in this case, π is set either equal to πv or to zero.
Unless πv < π < πB(ξ), in which case, in the conservative state, they elect the PMV.
Given the value of q, without loss of generality, let us order the two alternatives such that Ψ*(π1,q) > Ψ*(π2,q). A citizen at the constitutional stage prefers π1to π2 if and only if WE(π1,q;θ) > WE(π2,q;θ), which yields: θ > θ**(π1, π2) = [Ξ*(π2,q) - Ξ*(π1,q)]/[Ψ*(π1,q) - Ψ*(π2,q)]. Hence, the majority always includes the CMV.
When πB(ξ) > πv but W(πB(ξ), ξ;v) ≥ W(πA(ξ), ξ;v), the CMV prefers to prevent corruption in both states, setting π= πB(ξ) > πv. The outcome is qualitatively similar to the case discussed in Proposition 4, with the difference that in the progressive state the citizens elect a minister that constructs more roads than preferred by the CMV and less roads than preferred by the PMV.
If they were a majority, in the absence of corruption they could elect a candidate of type ζ = μ/p,* whose ideal policy gζ is equal to
which is positive if and only if θ < μ since dgθ/dθ>0. If the median voter is corrupt, θ*(π) < μ and hence θ < μ for all honest candidates. The median voter’s utility is thus maximized by electing the honest candidate with the largest value of θ, which is an honest candidate of type θ*(π).
This follows from
In the conservative state, the CMV’s utility is equal to W(π,v; v) ≤ W(πZ, v;v) = W(0,v;v), by definition, for all positive π ≤ πZ, and is at least as large if π is set instead equal to 0. In the progressive state the CMV’s utility is equal to W(π, ξ;v) = W(πA(ξ), ξ;v) = W(0, ξ;v) whenever π ≤ πA(ξ) (in which case the citizens elect a corrupt candidate of type α (ξ), as they do when π = 0) and is equal to W(π, ξ;v) < W(πA(ξ), ξ;v) whenever πA(ξ) < π < πZ< πB(ξ) (in which case the citizens elect a corrupt candidate of type θ*(π) > α(ξ) that is less preferred by the CMV than a candidate of type α(ξ)). The CMV’s expected utility is therefore larger if he sets π = 0 than if he sets π at any positive level below πZ. Note that πZ< πB(ξ) follows from the assumption that πv< πB(ξ).
In the progressive state, the CMV’s utility is diminishing in the interval [πA(ξ), πB(ξ)] (which includes πv), where higher levels of π induce the election of a corrupt citizen whose type is more distant from α(v) and who therefore implements a policy less preferred by the CMV. The CMV’s utility also diminishes in π in the interval [πB(ξ), πξ] where higher levels of π induce the election of an honest citizen whose type is more distant from the CMV’s. At π = πB(ξ), the CMV’ s utility increases discontinuously, from
When πW< π < πv, in the conservative state, the citizens elect an honest candidate of type θ*(π) < v and the CMV’s utility is equal to W(π,v;v) = V(gγ;v), which is continuous and differentiable in π, with W’π(π,v;v) = V’π(gγ;v) dgγ/dθ*(π) dθ*(π)/dπ continuous and positive (since V(gγ;v) is increasing in θ*(π) for θ*(π) < v). In the progressive state, the citizens elect a corrupt candidate of type θ*(π) > α (ξ) and the CMV’s utility is equal to
If πZ(v) < π < πA(ξ), the CMV’s expected utility is equal to