Corruption

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					                Corruption
• Corruption in general
• Recent examples – overview
  – Auditing politicians in Brazil (Ferraz and
    Finan)
  – Truckers paying bribes in Indonesia (Olken and
    Barron)
  – Getting a driver’s license in Delhi (Bertrand,
    Djankov, Hanna, and Mullainathan)
  – Paying parking tickets in the US (Fisman and
    Miguel)
                   Corruption
• Use of public office for private gain
  – Bureaucratic corruption
  – Political corruption
• Before 1990: a bit of corruption could be good for
  growth. Why?
  – Kleptocrat cares about the size of the pie.
  – Bribery may allow firms to get things done quickly.
• More recent view: corruption is one of the most
  important impediments to development => why?
• Corruption wastes taxpayers’ money.
• Policies implemented solely to generate
  opportunities for bribery.
• Undermines the rule of law - lax contract
  enforcement is hard for businesses. A big
  deterrent to firms.
• Wade’s article leads to more uncertainty about
  water timing and less well-maintained
  irrigation systems.
  – Bribes are high where uncertainty is high.
             Decentralized VS
           Centralized Corruption
• Decentralized - many bribe takers, not a coordinated
  effort.
• Centralized - leader organizes all corruption and
  determines the shares going to each person.
• With decentralized the total theft rate will be higher
  (more road blocks) but may actually have less bribe
  revenue because of that (fewer travelers). Thus,
  decentralized corruption has the worst incentives for
  growth.
• Centralized corruption is not as bad since corrupt leader
  cares about growth and the size of the pie and will limit
  the amount lower level officials take.
      Creating a new firm.
• In Bolivia follow 20 procedures, wait 82
  business days, pay $2,696 in fees.
• In Canada follow 2 procedures, wait 2
  business days, pay $280 in fees.
• In Georgia (the country) you can go through
  12 procedures, wait 70 days, and pay $270,
  or you can pay a legal advisory company
  that does it for you $450 and have it ready
  in 3 days!
Which are the most corrupt
        countries?
• Data from 2009 from Transparency
  International.
• Based on business people and
  country analysts' perceptions of
  corruption, defined as abuse of
  public office for private gain.
• Questions include bribery, kickbacks
  in procurement, embezzlement, and
  strength of anticorruption policies.
• Thailand is ranked 84!!
1    New Zealand         9.4
2    Denmark             9.3
3    Sweden, Singapore   9.2
5    Switzerland         9.0
16   Austria             7.9
17   Japan, UK           7.7
19   US                  7.5
84   Thailand            3.4
178 Burrma               1.4
179 Afghanistan          1.3
180 Somalia              1.1
 Overview of Corruption Studies
• Auditing politicians in Brazil (Ferraz and
  Finan)
• Starting in April 2003 as a policy by Lula.
  Randomly choose municipalities to audit
  every month. Gets info on all funds
  transferred to the municipality from the
  federal govt from 2001 on and finds out
  what happened to them. Post the findings
  on the internet and give them to the
  media. By July 2005 have reports for 669
  municipalities.
• Corruption includes fraud in
  procurements (e.g. limiting the number
  of bidders to benefit friends), diversion
  of funds (giving funds to a phantom
  firm that exists only on paper), and
  over-invoicing goods and services
  (paying more than it is worth).
• Of 669 municipalities 79% had
  corruption, and among those the
  average number of incidents was 2.45.
• There were elections in Oct 2004. 369
  audits before that and 300 audits after
• Compare re-election rates for mayors in
  audited vs non-audited municipalities.
  – They find no effect of auditing on re-election
    rates.
  – It doesn't matter whether or not there was an
    audit, it mattered what the audit found.
• Compare re-election rates for mayors with
  low corruption and those with high
  corruption.
  – Findings of higher corruption lead to lower re-
    election rates. Those mayors for whom no
    corruption was found are then much more likely
    to be re-elected.
  – Looks like voters are expecting around 1
    corruption incident per mayor.
• Look at effect of media and having a
  local radio station in your municipality.
• (22% of municipalities have a local
  radio station.)
• Biggest effects are when there are
  pre-election audits and a local radio
  station. If there is no local radio station
  then the audits are much less useful.
• Did a similar analysis with newspapers
  and finds nothing. People don't really
  read the newspaper.
• In sum - auditing can be quite helpful
  but need some way of getting the
  information to the voter (radio?). With
  no information transmission there are
  no effects of auditing.
• In addition, while the auditing does
  have an impact on political
  accountability, we still don't know if it
  has an effect on reducing corruption.
• Maybe the politician's new best option
  is to be super corrupt in a first term
  and not get re-elected rather than to
  not be corrupt but be in power for two
  terms.
 Truckers paying bribes in
   Indonesia (Olken and
         Barron)
• Enumerators ride along with
  truckers recording bribes paid on
  304 trips (observe 6000 payments).
  What do truckers pay for?
• i. Pay military and police to avoid
  harassment.
• ii. Pay at weigh stations to avoid
  fines for driving overweight.
• iii. Pay protection to criminal
  organizations (avoid theft or
• Payments average $40, or 13% of trip costs. (53%
  fuel, 14% cargo loading and unloading, 10% salary,
  5% food and lodging)
• Road passes through Aceh and N Sumatra.
  Indonesian govt withdraws police and military from
  roads in Aceh to enforce a peace agreement. No
  change in number of road blocks in N Sumatra.
  What happens? Average bribe paid in N Sumatra
  increases. But, not enough to offset revenue lost
  from reduction in checkpoints in Aceh.
• Evidence of price discrimination - surplus that can
  be extracted varies depending on checkpoints.
  Downstream checkpoints have more bargaining
  power and receive higher bribes. Also charge more
  to people with newer trucks and more valuable
  cargo.
  Getting a drivers license in Delhi
   (Bertrand, Djankov, Hanna, and
            Mullainathan)
• Followed 822 people while they got a
  driver's license. Average license getter pays
  1080 rupees, or 2.5 times the official 450
  fee. 60% don't take the exam.54% are
  unqualified to drive according to an
  independent test.
• People often go through agents to get their
  license. Only 23% of those with agents take
  driving test while 89% of those without
  agent do. 53% of those with agent fail
  independent test vs 25% of those who did
  not have agent.
• 822 participants divided into one of
  three groups.
• i. Control - just asked to return when
  they got their license to fill out survey.
• ii. Bonus - offered a bonus of 2,000
  rupees if they could get their license in
  32 days (minimum is 30 days).
• iii. Lesson - provided with up to 15
  free driving lessons.
• Results - 61% got license within 180 days.
  On average took 42 days.
• i. Bonus group more likely to get license and
  get it quickly, don't take test and drive
  badly. Lesson group also more likely to get
  license and pay less. Most extra money goes
  to agents.
• ii. How do agents affect outcomes?
• iii. New Delhi prohibits agents so people just
  (illegally) go somewhere else. You should go
  based on your address.
• iv. Comparison of New Delhi livers with and
  without agents.
   Paying parking tickets in
 the US (Fisman and Miguel)
• Is corruption cultural? Diplomats in
  NYC had immunity until 2002 so they
  didn't get into trouble if they didn't pay
  their parking tickets.
• High correlation between country's
  corruption measure and number of
  unpaid parking tickets. In 2002 when
  immunity ends, the relationship
  disappears.
 Corruption (II)

Spotlight on Indonesian
    Road Building
 How best to reduce corruption?
• Corruption creates efficiency cost.
• It has been suggested that corruption may
  be a major contributor to the low growth
  rates of many developing countries.
• Despite the importance of the problem, it is
  difficult to measure corruption.
• Becker and Stigler (1974) suggests that the right
  combination of monitoring and punishments can
  control corruption.
• Problem? Transfer corruption between officials.
• An alternative approach which has gained
  prominence in recent years is to increase
  grassroots participation by community members in
  local-level monitoring.
• Monitoring public projects is a public good =>
  free riding problem
• Olken (2007) examine these 2 alternative
  approaches to fighting corruption. He designed
  and conducted a randomized, controlled field
  experiment.
                     Details
•   Setting
•   Implementation
•   Accountability
•   Audits
                 Setting
• National Indonesian government
  sponsored a development program
  funded through a loan from the World
  Bank.
• Finances 15,000 villages each year.
• Usually for small scale infrastructure or
  for startup capital for micro-credit.
• Average grant is $8,800. Average annual
  village budget is only $7,800 so this is
  big.
             Implementation
• Each year a village puts together a
  proposal.
• Most common project is to cover a dirt
  road with sand, rock, and gravel.
• Data comes from 608 road projects from
  2003-2004.
• If project is funded, meeting is held to plan
  construction.
• No contractors are allowed and no more
  than 3% of costs can go to implementation
  team for their time.
           Accountability
• Lump sum grant at three points in
  time.
• 40% of money is disbursed at first,
  then accountability meeting, then
  another 40%, then another meeting,
  then another 20%.
• Must submit final accountability
  report to be eligible for grant in next
  year.
• Meetings attended by 40-50 adults
                        Audits
• Types of corruption include inflating the cost of inputs,
  inflating the quantity of inputs, putting false workers
  on the payroll, etc.
• After the projects were completed, engineers dug core
  samples in each road to estimate the quantity of
  materials used, surveyed local suppliers to estimate
  prices, and interviewed villagers to determine the wage
  paid.
• Missing expenditure = difference between what the
  village claimed the road cost to build and what the
  engineers estimated it actually cost to build = 24%
  across the villages in the study
• Missing expenditure => corruption
              Experiments
• External monitoring
• i. Audit Treatment - villages were told
  at first meeting that they'd be audited
  for sure, either during or after
  construction. Told that results would go
  to elected officials and to villagers.
  Could affect the probability of getting a
  grant in the future and villagers could be
  angry. 1-4 months after start of
  construction, audit 1 village in each
  subdistrict to show them this was for
  real. All villages were told they would
  be audited again later.
• Local-level Monitoring
• ii. Invitation Treatment - Anybody
  could go to the meeting, but in
  practice they don't go unless they're
  formally invited. Randomly gave
  300-500 invitations. Sent home with
  kids from school or gave to elders to
  distribute.
• iii. Invitation with Comment
  Treatment - in some invitation
  villages they also added an
  anonymous comment form to the
Experiment
• Audit randomized at the sub-district
  level.
• Invitations randomized at the village
  level.

• Did the randomization work?

• Not so well for audit treatment.
               Results
• Main independent variable is the
  reported amount spent minus the
  independent account spent, as a
  percent.
• Audits decrease corruption.
• But, still 20% missing when audits
  are 100% certain to happen.
• Where does corruption come from?
  Comes from quantities. Why?
• Main results for invitations. They do
  have an effect on attendance and
  speaking up.
• They do have an effect on the number
  of corruption related issues brought up
  and whether a `serious' response will
  be taken.
But, find no effect whatsoever of invitations on
corruption.
• Does this imply that government
  auditing can reduce corruption while
  grass-roots monitoring is not
  helpful?
• Are audits cost effective? They cost
  $355 each and reduce the amount
  lost by $468, plus you probably get a
  better road too, etc.
                 Conclusion
• Increasing the prob of external audits substantially
  reduced missing funds from 27.7 to 19.2%.
• Why not larger?
• Increasing in grassroots participation in
  monitoring reduced only missing labor
  expenditures, with no impact on materials and
  overall.
• Why? What does this imply?
• Issuing anonymous comment forms reduced
  missing fund only if the forms were distributed via
  schools, completely bypassing village officials.

				
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posted:12/22/2011
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