Is it wrong to rank? A critical assessment of corruption indices

This paper emphasizes the importance of collecting information on corruption, while still stressing critical aspects of the most applied sources of such information, the cross-country composite corruption indices. Are these indices damaging and misleading or are they informative and useful? The paper points to the implication of the lack of a clear distinction between legal and illegal payments or ways of gaining influence. It summarizes the main limitations of Transparency International's Corruption Perceptions Index (CPI), underscores the problem of expecting perceptions to be reliable, and discusses the problem of incorrect understanding and usage of the index. Publicity does not necessarily mean progress, and the construction of the CPI should be influenced by the way this index is applied by the public. A final question is whether it is possible to increase the CPI's value by creating incentives for states to improve their achievements under, for instance, the OECD anti-bribery convention.Corruption Index Data

Business corruption, uncertainty and risk aversion

The presence of business-corruption in a market provokes firms to make choices between legal business approaches and illegal bribery. The outcome of a chosen strategy will usually be uncertain at the time the decision is made, and a firm's decision will depend partly on its attitude towards risk. Drawing on the empirical data provided by a survey of 82 Norwegian exporting businesses, the paper proposes a theory about firm's choices between legal and illegal business practices. It begins by describing the risks, uncertainties and benefits attached to bribery, and specifies their impact on firm's propensity to offer bribes. It then demonstrates how risk averse firms can be more inclined to offer bribes than risk neutral, and even risk attracted firms. Although the analysis diverges from existing theory in stressing the differences between illegal and legal forms of rent-seeking, the findings correspond to the results reported in the literature on legal forms of rent-seeking. JEL D81, F23, K40Rent-seeking Corruption Firms Risk JEL D81, F23, K40

Beaten by bribery: Why not blow the whistle?

A recent business survey in Norway reveals that firms rarely react to corruption, even when they have lost important contracts as a result. This disinclination to take action is explored in the light of market structures, business efficiency, judicial institutions and political corruption. The paper develops a theory about how these four variables deter firms from reacting against corruption, and, in particular, how the potential for collusion reinforces the incentives to remain silent. Considered separately, each of the factors are unable to explain the low frequency of anti-corruption reactions between firms. Considered in combination, however, the various impediments suggest a more complete explanation: When conditions in market structure suggest that the best response would be to take action, political conditions may favour inaction. When a potential whistle-blower expects support from local politicians or legal institutions, the given offender may be impervious to sanctions; its role in the market will not be altered by the given case. The sum of precondition for action suggests that firms rarely react against corruption. JEL L10, K42Corruption Whistleblowing Industrial organization Collusion JEL L10, K42

An Economic Analysis of Debarment

With a view to reducing the consequences of corruption in public procurement, many governments have introduced debarment of suppliers found guilty of corrup- tion and some other forms of crime. This paper explores the market effects of debarment on public procurement. Debarment is found to make little difference in markets with high competition, while in markets with low competition it may deter corruption as long as firms value public procurement contracts in the future and there is a certain risk of being detected in corruption. On the other hand, debarment when it works has an anti-competitive effect, and this effect will contribute to facilitate collusion between suppliers. Debarment may work as a tool against collusion, but only if targeting one firm at the time (such as a ring-leader or the specific beneficiary when the collusion is detected) and not all the members of a cartel. If designed with an understanding of the market mechanisms at play, debarment can deter both collusion and corruption, thus improving the results of public procurement. If so, most current debarment regimes need modification

Corporate criminals in a market context: enforcement and optimal sanctions

By combining approaches from the economic theory of crime and of industrial organization, this paper analyzes optimal enforcement for three different forms of corporate misconduct that harm competition. The analysis shows why corporate crime is more harmful in large markets, why governments have a disinclination to sanction firms whose crime materializes abroad, and why leniency for those who self-report their crime is a complement, and not a substitute, to independent investigation and enforcement. As public authorities rely increasingly on self-reporting by companies to detect cartels, the number of leniency applications is likely to decline, and this is borne out by data. Upon a review of 50 cases of corporate liability from five European countries, competition law enforcement, governed by a unified legal regime, is more efficient than enforcement in bribery and money laundering cases, governed by disparate criminal law regimes. Sanction predictability and transparency are higher when governments cooperate closely with each other in law enforcement, when there are elements of supra-national authority, and when the offense is regulated by a separate legal instrument. Given our results, Europe would benefit from stronger supra-national cooperation in regulation and enforcement of transnational corporate crime, especially for the sake of deterrent penalties against crime committed abroad

Corruption. A review of Contemporary Research

During the last decade corruption has become a topical issue in the international development policy debate. Research on corruption has also expanded rapidly, taking many different directions both within and across disciplines. This report provides an overview of contemporary research on corruption. The academic focus is on economic approaches, but perspectives from political science and social anthropology are also included. The presentation is mostly non-technical, although a few expositions of more analytically demanding matters are included. Relevance for development policy is the underlying guide for the selection of topics that are included in the study. The report should be useful for development practitioners and foreign aid officials, as well as for students and journalists interested in development issues

The resource curse: Which institutions matter? * Ivar Kolstad

Abstract Two types of models are dominant in the current resource curse literature. One type of model studies the selection of entrepreneurs into rent-seeking versus productive activities. The other type analyzes the use of patronage by politicians seeking re-election. The policy implications of the two models are quite different. The first model suggests that institutions governing the private sector ought to be improved. The second that institutions governing the public sector should be emphasized. This paper empirically tests the impact of the private versus public sector institutions on the resource curse, using cross-country data from Sachs and Warner (1997a) and Polity IV. The main result is that only improved private sector institutions ameliorate the resource curse

www.ecares.org Dealing with Politics for Money and Power in Infrastructure

Policy recommendations for infrastructure provision usually build on a well-established understanding of best practice for sector governance. Too rarely are they adapted to the country-specific political environment even if this is an area where policy choices are likely to be subject to private agendas in politics. The fact that such private agendas are often ignored goes a long way toward explaining why infrastructure policies fail and why best practice can be counterproductive. While non-benevolence and rent-seeking are well described in the literature and anecdotes abound, there is only limited consideration of how the different incentive problems in politics impede policy improvements in infrastructure. This paper addresses why politics in infrastructure cannot be ignored, drawing on theoretical results and a systematic review of experiences. It reviews how different private agendas in politics will have different impact for sector-governance decisions – and hence service delivery. The concept of best practice in policy recommendations should be reconsidered in a wide perspective and allow for tailored solutions based on an understanding of the given incentive problems. Policy recommendations should take into account how coordination trade-offs may complicate efforts to reduce the possible impact of private agendas on infrastructure policy decisions. While more transparency linked to service delivery indicators is a “safe ” recommendation, it is also clear that the demand for good governanc

Corruption and competition for resources

An increasing share of world FDI is carried out by multinationals from developing countries. These investors may have objectives and constraints that differ from their developed country counterparts. In this paper we focus on differences in attitudes to corruption, and how these may shape the competition for the right to extract resources in a developing country context. We show how differences in the investors level of technology and differences in the host country government's trade-off between bribes and taxes determine who wins the competition for the resource and the winning price. We find that the entry of a corrupt investor may induce the honest investor to offer bribes instead of taxes. Surprisingly, however, our analysis also demonstrates that under some conditions, the entry of a corrupt investor may in fact induce the honest investor to increase its tax payments

Corruption and market reform

Market reforms in developing and transition economies have sometimes failed to deliver the desired welfare effects. Corruption may be an important reason for the inefficiency of market reforms, such as privatization campaigns. The present paper demonstrates how corruption can affect the choice of buyer of a public asset. Our main result is that market reform in highly corrupt societies is likely to result in less competition and less economic efficiency than reform in less corrupt societies. We also demonstrate that the level of bribes in the sale of public assets does not necessarily increase in the government’s emphasis on bribes