the persistence of corruption: a labor market approach
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The Persistence of Corruption: A Labor Market Approach. Bonnie J. Palifka Presented at the 150-mile conference Edinburg, Texas April 22, 2006. Outline. Introduction The Model Labor Market Implications Conclusions and Extensions. Introduction: Corruption and Growth. - PowerPoint PPT PresentationTRANSCRIPT
The Persistence of Corruption: A Labor Market Approach
Bonnie J. Palifka
Presented at the 150-mile conferenceEdinburg, Texas
April 22, 2006
Outline• Introduction• The Model• Labor Market Implications• Conclusions and Extensions
Introduction: Corruption and Growth
• Bribes are expensive.• Corruption may introduce uncertainty.• Both of these factors reduce investment,
especially FDI.• Many governments are now trying to
combat corruption.
The Study of Corruption1990s• resurgence of institutional economics • economies in transition• development of corruption indices
(Transparency International).• Research:
– Corruption and growth (Mauro, 1995)– Determinants of Corruption (Schleifer and Vishny,
1993; Bac, 1996)
The Persistence of Corruption
Corruption is hard to combat: it persists.
Approaches to the Persistence of Corruption:• inherited reputation (Tirole, 1996)• collusion between workers and supervisors (Bac,
1996)• externalities (Andvig and Moene, 1990)
Each of these models examines the decision to accept or reject a bribe once in a position to do so.
The Persistence of Corruption• My model is one of labor supply: the choice
between a position with the opportunity to receive bribes, and one without such “perqs”.
• separating equilibrium • four progressively complex models• self-sorting based on propensity to corruption
– "honest" workers take the job without bribery opportunities
– "corrupt" workers sort themselves into the "corrupt" job.
The ModelThe Agents
• Honest = H• Corrupt = C
• The agents are identical in all other respects.
• The risk aversion or corruptibility of each is privately known but unobservable.
The ModelRisk Aversion (proxy for propensity to corruption)To capture the disparity in risk aversion, I use the constant
relative risk aversion (CRRA) utility function:
if 0, 1
if = 1
where v is the value of employment in a given position and is a measure of aversion to risk.
U v v( )
1
1
vvU ln
The ModelRisk Aversion
For simplicity, I assume
H = 1C = 0 (C is risk-neutral.)
This can be generalized to a continuum of risk aversion.
The ModelEmployment options
private sector job = JP
government job = JG
Wages are wP and wG, respectively.
JG has monopoly control over the provision of a license, permit, or other government service.
The ModelCase 1: the simplest case.
Each period any worker in JG is offered and must accept a bribe of fixed amount b.
If detected, the worker is fined X.
The supervisor detects, charges, and fines one worker each period, so the probability of detection is q = 1/N.
The ModelCase 1: the simplest case. a separating equilibrium exists if
In other words, C chooses JG (and H does not) when the difference between the expected bribe and the expected punishment is larger than the wage gap (but not too much larger).
High bLow q (high N)Low X
qXbqwwXwqbwq GPGG )1()]ln()ln()1exp[(
The ModelCase 2: Bribe Offered with Fixed Probability
Gives the same result, with the bribe subject to a probabilistic factor.
The “acceptable” wage gap is lower than in Case 1.
Case 3: Bribe Drawn from a Distribution
Gives the same basic result, with uncertainty
The ModelCase 4: Career Choice in the Face of Risk and Uncertainty
basic lifecycle utility model with uncertainty concerning future wages and bribes
)}(),({max, GiPiiJJ
JEUJEUVGP
The ModelCase 4: Career Choice in the Face of Risk and
Uncertainty—Results
1. H prefers JP as wP-wG and b decrease and as the variances of wG and b increase. Therefore, if either the government wages or possible bribes become more uncertain, the honest agent will be less likely to want the government job.
2. C responds only to changes in the means of (expected) future wages and bribes.
The ModelCase 4: Career Choice in the Face of Risk and
Uncertainty—Results
3. in a multi-agent continuum of risk aversion, higher variances in government wages or bribes accruing to government positions will result in a higher proportion of such employees being "corrupt".
Variances in wages might arise from perennial budget problems or change-of-regime phenomena, while variance in bribes could be caused by changing regulatory environments.
Labor Market Implications
Equilibrium bribe and wages
b (distribution) is determined in the market for "bent rules". (Palifka, 1997)
If b , then a larger proportion of agents prefer JG and the supply of labor in the government sector increases, while that of the private sector decreases.
wG wP (wP - wG)
but then fewer risk-averse workers will change sectors, ameliorating the wage-gap effect.
Regulations
Bribe
Corruption
wG
may
Persistence of Corruption
Conclusions and Extensions
Conclusions
This paper presents an alternative explanation for the persistence of corruption in certain occupations: when a separating equilibrium exists, the opportunity for bribery attracts a disproportionate number of "corrupt" workers to “government” jobs, while "honest" workers avoid such jobs.
Conclusions and ExtensionsConclusions
When the corrupt job is in the government sector, regulations may raise the equilibrium bribe, attracting more risk-averse workers to that sector, depressing government wages and raising private sector wages, with the net effect of increasing the public-private wage gap that is often blamed for government officials turning to bribery in the first place.
Conclusions and Extensions
Minor Extensions• Detection distribution (Beenstock, 1979)• Finite (known) length of employment• Exogenous probability of termination
(e.g., Carrillo, 1996)• Corrupt hiring official• Corrupt supervisor
Conclusions and Extensions
Major Extensions• General equilibrium, including demand
for labor and the market for “bent rules”.• Endogenous government regulations• Endogenous anti-corruption enforcement
(Dabla, 1997)• Empirical testing with data
Thank you!
Your comments are appreciated.