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Shleifer and Vishny: Corruption

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Shleifer and Vishny. 1993. Corruption. Quarterly Journal of Economics 108 (3): 599-617.

The authors study the results of two different kinds of corruption:

  • In corruption-without-theft, government agents demand a bribe above any required fees (so the government still receives its fees)
  • In corruption-with-theft, government agencies demand a bribe but do not give the government its fees (as with customs agents who take a bribe instead of collecting customs fees)
  • Both buyers and sellers benefit from corruption-with-theft (since government services can be procured more cheaply), so one of the first steps in ending corruption is developing adequate accounting systems to prevent the theft.

Corruption can be costly for two broad reasons:

  1. weak central government. When the central government can't prevent agencies from claiming new turf, they'll all want a claim on every transaction so that they can get more revenue. There is very little foreign investment in Russia because you have to bribe "every agency involved in foreign investment, including the foreign investment office, the relevant industrial ministry, the finance ministry, the executive branch of the local government, the legislative branch, the central bank, the state property bureau, and so on." (615)
  2. "The second broad reason that corruption is costly is the distortions entailed by the necessary secrecy of corruption. The demands of secrecy can shift a country's investments away from the highest value projects, such as health and education, into potentially useless projects, such as defense and infrastructure, if the latter offer better opportunities for secret corruption. The demands of secrecy can also cause leaders of a country to maintain monopolies, to prevent entry, and to discourage innovation by outsiders if expanding the ranks of the elite can expose existing corruption practices. Such distortions from corruption can discourage useful investment and growth."