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The new laws of decentralization and corruption in Indonesia:examination of provincial and district data

  • Kuncoro, Ari

The theoritical literature makes ambiguous predication about the relationship between the extent of rent extraction by private parties and its impact on economic activities. One view argues that after putting ethical consideration aside, corruption may in fact improve efficiency, particularly in developing economies. In this model the size of bribes by different economci agents could reflect their different opportunity cost. Better firms are more willing to buy effective ered tape. The theory suggesting that bribery may lead to ower effective red tape is known as the efficient grease hypothesis. The crucial assumption of this model is that the red tape and regulatory burden can be taken as exogenous, independent of the incentive for officials to take bribes. The opposing view on the other hand asserts that because the bureaucrats have discretionaty power with given regulation, regulatory burden may be endogenously set by corrupt officials such that they customize the nature and the amount of harrasment on firms to extract masimum bribe possible. In this model firms that pay more bribes could still face higher, not lower, effective red tape. Consequently corruption could lower economic efficiecy insteaf of improving it. In this paper we estimate a model whereby bribe could be endogenous. The model stresses the role of firms' commitment ability's function of their characteristics. We use the data from the recently completed survey on the governance of the local governments in Indonesia. The data cover bribe that needs to be paid by firms to goverment officials at the district level. Other aspects of governance such as transparency, accountability, efficiency and the general attitude toward business sector are included in the data as well. The firm level regression suggests that the amount of bribe paid increases with the firms size. Thus rejects the efficient grease hypothesis.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa02p053.

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Date of creation: Aug 2002
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Handle: RePEc:wiw:wiwrsa:ersa02p053
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  1. Daniel Kaufmann & Shang-Jin Wei, 2000. "Does 'Grease Money' Speed Up the Wheels of Commerce?," IMF Working Papers 00/64, International Monetary Fund.
  2. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  3. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  4. Vito Tanzi & Hamid Reza Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 97/139, International Monetary Fund.
  5. Kaufman, Daniel & Shang-Jin Wei, 1999. "Does"grease money"speed up the wheels of commerce?," Policy Research Working Paper Series 2254, The World Bank.
  6. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
  7. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 559-594, December.
  8. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  9. Natasha Hamilton-Hart, 2001. "Anti-Corruption Strategies In Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 37(1), pages 65-82.
  10. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
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