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 conferenceEdinburg, Texas
April 22, 2006
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Outline• Introduction• The Model• Labor Market Implications• Conclusions and Extensions
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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.
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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)
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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.
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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.
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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.
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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
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The ModelRisk Aversion
For simplicity, I assume
H = 1C = 0 (C is risk-neutral.)
This can be generalized to a continuum of risk aversion.
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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.
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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.
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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[(
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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
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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
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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.
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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.
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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.
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Regulations
Bribe
Corruption
wG
may
Persistence of Corruption
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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.
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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.
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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
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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
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Thank you!
Your comments are appreciated.