The Impact of Corruption on Consumer Markets: Evidence from the Allocation of Second-Generation Wireless Spectrum in India

Theoretical predictions of the impact of corruption on economic efficiency are ambiguous, with models allowing for positive, negative, or neutral effects. While much evidence exists on levels of corruption, less is available on its impact, particularly its impacts on consumer markets. This paper investigates empirically the effect of the corrupt sale of spectrum licenses to ineligible firms on the wireless-telecommunications market in India. I find that the corrupt allocation had, at worst, no impact on the number of subscribers, prices, usage, revenues, competition, and measures of quality. I argue that the market-based transfer of licenses to competent firms other than the original awardees, combined with fierce competition in the telecommunications sector, may have mitigated potential deleterious impacts of corruption on consumers. These results suggest that the original corrupt allocation did not matter, which provides support for the Coase theorem.