Abstract
Higher levels of government expenditures and more regulation naturally invite corruption, because they provide the opportunity for government officials to be paid off for regulatory favors, subsidies, and government contracts. Some countries have relatively large governments but lower levels of corruption. Scandinavian countries offer examples. While institutional differences may explain some of the cross-country differences in corruption, the most consistent relationship is that high levels of regulation are associated with more corruption. When looking at the effect of the size of government, it is the regulatory state, rather than the productive or redistributive state, that is associated with corruption.
Similar content being viewed by others
Notes
The term has a moral connotation to it, but this paper does not consider moral corruption beyond the definition in this sentence. Private sector behavior might also be corrupt if, for example, an employee embezzles funds from his/her employer, but this is fraudulent activity done without the employer’s knowledge and, significantly for present purposes, the costs are borne by the private parties involved. Fraud therefore can be viewed as the private sector analog to public sector corruption. The empirical work, in this paper and in the literature more generally, measures corruption with regard to government activities, rather than private sector fraud or moral depravity.
The regulatory component of the EFW index aggregates 15 individual components into three broad areas: credit market regulations, labor market regulations, and business regulations, so it includes regulations on economic activity but not regulations on social or other activity. Construction of the index is described in Gwartney et al. (2014).
References
Acemoglu, D., Johnson, S., & Robinson, J. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369–1401.
Ades, A., & Di Tella, R. (1999). Rents, competition, and corruption. American Economic Review, 89(4), 982–993.
Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S., & Wacziarg, R. (2003). Fractionalization. Journal of Economic Growth, 8(2), 155–194.
Allison, J. A. (2013). The financial crisis and the free market cure. New York: McGraw-Hill.
Bartels, L. M. (2008). Unequal democracy: The political economy of the new gilded age. New York and Princeton: Russell Sage Foundation; Princeton University Press.
Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5, Part1), 893–921.
Baumol, W. J. (1993). Entrepreneurship, management, and the structure of payoffs. Cambridge, MA: MIT Press.
Buchanan, J. M. (1990). The domain of constitutional economics. Constitutional Political Economy, 1(1), 1–18.
Fisman, R., & Gatti, R. (1999). Decentralization and corruption: Cross-country and cross-state evidence. Washington, D.C.: The World Bank.
Gwartney, J., Lawson, R., & Hall, J. (2014). Economic freedom of the world 2014 annual report. Vancouver, BC: Fraser Institute.
Hacker, J. S., & Pierson, P. (2010). Winner-take-all politics: How Washington made the rich richer—and turned its back on the middle class. New York: Simon & Schuster.
Holcombe, R. G. (2014). What Stiglitz and Stockman have in common. Cato Journal, 34(3), 569–579.
Kaufmann, D., Kraay, A., & Zoido-Lobaton, P. (2005). Aggregating governance indicators. Working Paper No. 2195, The World Bank, Washington, D.C.
Klerman, D., Mahoney, P., Spamann, H., & Weinstein, M. (2009). Legal origin and economic growth. Unpublished manuscript.
Kolko, G. (1977). The triumph of conservatism: A reinterpretation of American history, 1900–1916. New York: The Free Press.
Krueger, A. O. (1974). The political economy of the rent-seeking society. American Economic Review, 64, 291–303.
Kunicová, J., & Rose-Ackerman, S. (2005). Electoral rules and constitutional structures as constraints on corruption. British Journal of Political Science, 35(04), 573–606.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1999). The quality of government. Journal of Law Economics and Organization, 15, 222–279.
Lederman, D., Loayza, N. V., & Soares, R. R. (2005). Accountability and corruption: Political institutions matter. Economics and Politics, 17(1), 1–35.
Marshall, M. G., & Jaggers, K. (2005). Polity IV project: Political regime characteristics and transitions, 1800–2002. http://www.systemicpeace.org/inscrdata.html. Accessed 4 June 2015.
Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110(3), 681–712.
McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation. Journal of Legal Studies, 16(1), 101–118.
McChesney, F. S. (1997). Money for nothing: Politicians, rent extraction, and political extortion. Cambridge: Harvard University Press.
Persson, T., & Tabellini, G. E. (2003). The economic effects of constitutions. Cambridge: MIT press.
Rock, M. T. (2009). Corruption and democracy. Journal of Development Studies, 45(1), 55–75.
Schweizer, P. (2013). Extortion. How politicians extract your money, buy votes, and line their own pockets. Boston: Houghton Mifflin Harcourt.
Serra, D. (2006). Empirical determinants of corruption: A sensitivity analysis. Public Choice, 126(1–2), 225–256.
Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108(3), 599–617.
Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2(1), 3–21.
Stiglitz, J. E. (2012). The price of inequality: How today’s divided society endangers the future. New York: W.W. Norton.
Stockman, D. A. (2013). The great deformation: The corruption of capitalism in America. New York: Public Affairs Press.
Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76(3), 399–457.
Tullock, G. (1967). The welfare cost of tariffs, monopolies, and theft. Western Economic Journal, 5, 224–232.
Acknowledgments
The authors gratefully acknowledge the helpful comments from Russell Sobel, two referees, and the journal’s editor.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
See Table 3.
Rights and permissions
About this article
Cite this article
Holcombe, R.G., Boudreaux, C.J. Regulation and corruption. Public Choice 164, 75–85 (2015). https://doi.org/10.1007/s11127-015-0263-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11127-015-0263-x