Instability and the Incentives for Corruption

Instability and the Incentives for Corruption (2009)
with Davin Chor and Quoc-Anh Do. Economics & Politics 21(1): 42-92, March 2009 [PDF]

We investigate the relationship between corruption and political stabil-ity, from both theoretical and empirical perspectives. We propose amodel of incumbent behavior that features the interplay of two effects: ahorizon effect, whereby greater instability leads the incumbent to em-bezzle more during his short window of opportunity, and ademandeffect, by which the private sector is more willing to bribe stable in-cumbents. The horizon effect dominates at low levels of stability, be-cause firms are unwilling to pay high bribes and unstable incumbentshave strong incentives to embezzle, whereas the demand effect gainssalience in more stable regimes. Together, these two effects generate anon-monotonic, U-shaped relationship between total corruption andstability. On the empirical side, we find a robust U-shaped pattern be-tween country indices of corruption perception and various measures ofincumbent stability, including historically observed average tenures ofchief executives and governing parties: regimes that are very stable orvery unstable display higher levels of corruption when compared withthose in an intermediate range of stability. These results suggest thatminimizing corruption may require an electoral system that featuressome re-election incentives, but with an eventual term limit.