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Instability and Incentives for Corruption

  • Davin Chor

    (SMU)

  • Do Quoc-Anh
  • Filipe R Campante

We investigate the relationship between corruption and political stability, from both theoretical and empirical perspectives. We propose a model of incumbent behavior that features the interplay of two effects : A horizon effect, whereby greater instability leads the incumbent to embezzle more during his short window of opportunity; and a demand effect, by which the private sector is more willing to bribe stable incumbents. The horizon effect dominates at low levels of stability, since firms are unwilling to pay high bribes and unstable incumbents have strong incentives to embezzle, whereas the demand effect gains salience in more stable regimes. Together, these two effects generate a nonmonotonic, U-shaped relationship between total corruption and stability. On the empirical side, we find a robust U-shaped pattern between country indices of corruption perception and various measures of incumbent stability, including historically-observed average tenures of chief executives and governing parties : Regimes that are very stable or very unstable display higher levels of corruption when compared to those in an intermediate range of stability. These results suggest that minimizing corruption may require an electoral system that features some reelection incentives, but with an eventual term limit.

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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22070.

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Date of creation: Jan 2008
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Handle: RePEc:eab:macroe:22070
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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