Corruption and trade tariffs, or a case for uniform tariffs

By explicitly accounting for the interaction between importers and corrupt customs officials, the author argues that setting trade tariff rates at a uniform level, limits public official's ability to extract bribes from importers. If the government's main objective is to raise revenues at the minimum cost to welfare, optimally-set tariff rates will be inversely proportional to the elasticity of demand for imports. So they will generally differ across goods. Such a menu of tariff rates endows customs officials with the opportunity to extract rent from importers. If officials have enough discretionary power, they might threaten to misclassify goods into more heavily taxed categories unless importers pay them a bribe. Because of the bribe, the effective tariff rate for the importing firm increases, so demand for the good decreases. The resulting drop in import demand implies an efficiency loss as well as lower government revenues, compared with the optimal taxation benchmark without corruption. A similar argument applies when customs officials offer to classify goods into low-tariff categories in exchange for a bribe. Setting trade tariffs at a uniform level eliminates officials'opportunities to extract rents. Thus, when corruption is pervasive, a uniform tariff can deliver more government revenues and welfare than the optimally set (Ramsey) tariff benchmark. The empirical evidence confirms that these considerations are relevant to policymaking, since a robust association between the standard deviation of trade tariffs - a measure of the diversification of tariff menus - and corruption emerges across countries.Trade Policy,Environmental Economics&Policies,Economic Theory&Research,Export Competitiveness,Decentralization,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Export Competitiveness,Trade Policy

Family altruism and incentives

The author builds on the altruistic model of the family, to explore the strategic interaction between altruistic parents, and selfish children, when children's efforts are endogenous. If there is uncertainty about the amount of income the children will realize, and if parents have imperfect information, the children have an incentive to exert little effort, and to rely on their parent's altruistically motivated transfers. Because of this, parents face a tradeoff between the insurance that bequests implicitly provide their children, and the disincentive to work prompted by their altruism. The author shows that if parents can credibly commit to a pattern of transfers, they will choose not to compensate children in bad outcomes, as much as predicted by the standard (no uncertainty, no asymmetric information) dynastic model of the family. Alternatively, parents may choose to forgo any insurance, and offer a fixed level of bequest, to elicit greater effort from their children. The optimal transfers structure that the author derives, reconciles the predictions of the altruistic family model, with much of the existing evidence on inter-generational transfers, which suggests that parents compensate only partially, or not at all, for earnings differentials among their children. Moreover, the author shows that Ricardian equivalence holds in this setup, except when non-negativity constraints are binding.Economic Theory&Research,Environmental Economics&Policies,Health Economics&Finance,Educational Sciences,Safety Nets and Transfers

Informality among formal firms : firm-level, cross-country evidence on tax compliance and access to credit

The authors use firm-level, cross-county data from Investment Climate surveys in 49 developing countries to investigate an important channel through which informality can affect productivity: access to credit and external finance. Informality is measured as self-reported lack of tax compliance in a sample of registered firms that also answered questions on a large set of other characteristics. The authors find that more tax compliance is significantly associated with more access to credit both in OLS and in country fixed effects estimates. In particular, the link between credit and formality is stronger in high-formality countries. This suggests that firms'balance sheets are relatively more informative for financial institutions in environments where signal extraction is a less noisy process. The authors'results are robust to the inclusion of a wide array of correlates and to two-stage estimation.Access to Finance,,Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress

Child Labor: The Role of Income Variability and Access to Credit Across Countries

This paper examines the relationship between child labor and access to credit at a cross-country level. Even though this link is theoretically central to child labor, so far there has been little work done to assess its importance empirically. We measure child labor as a country aggregate, and credit constraints are proxied by the extent of financial development. These two variables display a strong negative relationship, which we show is robust to selection on observables (by controlling for a wide range of variables such as GDP per capita, urbanization, initial child labor, schooling, fertility, legal institutions, inequality, and openness, and by allowing for a nonparametric functional form), and to selection on unobservables (by allowing for fixed effects). We find that the magnitude of the association between our proxy of access to credit and child labor is large in the sub-sample of poor countries. Moreover, in the absence of developed financial markets, households appear to resort substantially to child labor in order to cope with income variability. This evidence suggests that policies aimed at widening households' access to credit could be effective in reducing the extent of child labor.

Decentralization and corruption - evidence across countries

The relationship between decentralization of government activities and the extent of rent extraction by private parties is an important element in the recent debate on institutional design. The theoretical literature makes ambiguous predictions about this relationship, and it has remained virtually unexamined by empiricists. The authors make a first attempt at examining the issue empirically, by looking at the cross-country relationship between fiscal decentralization and corruption as measured by a number of different indices. Their estimates suggest that fiscal decentralization in government spending is significantly associated with lower corruption. Moreover, they find that the origin of a country's legal system - for example, civil versus common legal code - performs extremely well as an instrument for decentralization. The estimated relationship between decentralization, when so instrumented, and corruption is even stronger. The evidence suggests a number of interesting areas for future work, including investigating whether there are specific services for which decentralized provision has a particularly strong impact on political rent extraction, and understanding the channels through which decentralization succeeds in keeping corruption in check.National Governance,Decentralization,Pharmaceuticals&Pharmacoeconomics,Economic Theory&Research,Legal Products,National Governance,Governance Indicators,Pharmaceuticals&Pharmacoeconomics,Economic Theory&Research,Legal Products

Does access to credit improve productivity ? Evidence from Bulgarian firms

Although it is widely accepted that financial development is associated with higher growth, the evidence on the channels through which credit affects growth on the micro-level is scant. Using data from a cross section of Bulgarian firms, the authors estimate the impact of access to credit (as proxied by indicators of whether firms have access to a credit or overdraft facility) on productivity. To overcome potential omitted variable bias of OLS estimates, they use information on firms'past growth to instrument for access to credit. The authors find credit to be positively and strongly associated with total factor productivity. These results are robust to a wide range of robustness checks.Banks&Banking Reform,Economic Theory&Research,Investment and Investment Climate,Economic Growth,Financial Intermediation

Individual attitudes toward corruption: do social effects matter?

Using individual-level data for 35 countries, the authors investigate the microeconomic determinants of attitudes toward corruption. They find women, employed, less wealthy, and older individuals to be more averse to corruption. The authors also provide evidence that social effects play an important role in determining individual attitudes toward corruption, as these are robustly and significantly associated with the average level of tolerance of corruption in the region. This finding lends empirical support to theoretical models where corruption emerges in multiple equilibria and suggests that"big-push"policies might be particularly effective in combating corruption.Pharmaceuticals&Pharmacoeconomics,Environmental Economics&Policies,Poverty Monitoring&Analysis,Decentralization,Health Economics&Finance,Pharmaceuticals&Pharmacoeconomics,Governance Indicators,Environmental Economics&Policies,National Governance,Poverty Monitoring&Analysis

Why Should We Care About Child Labor? The Education, Labor Market, and Health Consequences of Child Labor

Although there is an extensive literature on the determinants of child labor and many initiatives aimed at combating it, there is limited evidence on the consequences of child labor on socio-economic outcomes such as education, wages, and health. We evaluate the causal effect of child labor participation on these outcomes using panel data from Vietnam and an instrumental variables strategy. Five years subsequent to the child labor experience, we find significant negative impacts on school participation and educational attainment, but also find substantially higher earnings for those (young) adults who worked as children. We find no significant effects on health. Over a longer horizon, we estimate that from age 30 onward the forgone earnings attributable to lost schooling exceed any earnings gain associated with child labor and that the net present discounted value of child labor is positive for discount rates of 11.5 percent or higher. We show that child labor is prevalent among households likely to have higher borrowing costs, that are farther from schools, and whose adult members experienced negative returns to their own education. This evidence suggests that reducing child labor will require facilitating access to credit and will also require households to be forward looking.

Child labor, income shocks, and access to credit

Although a growing theoretical literature points to credit constraints asan important source of inefficiently high child labor, little work has been done to assess its empirical relevance. Using panel data from Tanzania, the authors find that households respond to transitory income shocks by increasing child labor, but that the extent to which child labor is used as a buffer is lower when households have access to credit. These findings contribute to the empirical literature on the permanent income hypothesis by showing that credit-constrained households actively use child labor to smooth their income. Moreover, they highlight a potentially important determinant of child labor and, as a result, a mechanism that can be used to tackle it.Environmental Economics&Policies,Labor Policies,Children and Youth,Economic Theory&Research,Health Economics&Finance,Health Economics&Finance,Street Children,Environmental Economics&Policies,Youth and Governance,Children and Youth

The consequences of child labor : evidence from longitudinal data in rural Tanzania

This paper exploits a unique longitudinal data set from Tanzania to examine the consequences of child labor on education, employment choices, and marital status over a 10-year horizon. Shocks to crop production and rainfall are used as instrumental variables for child labor. For boys, the findings show that a one-standard-deviation (5.7 hour) increase in child labor leads 10 years later to a loss of approximately one year of schooling and to a substantial increase in the likelihood of farming and of marrying at a younger age. Strikingly, there are no significant effects on education for girls, but there is a significant increase in the likelihood of marrying young. The findings also show that crop shocks lead to an increase in agricultural work for boys and instead lead to an increase in chore hours for girls. The results are consistent with education being a lower priority for girls and/or with chores causing less disruption for education than agricultural work. The increased chore hours could also account for the results on marriage for girls.Street Children,Youth and Governance,Labor Policies,Labor Markets,Children and Youth