Instability and the Incentives for Corruption

Abstract

We investigate the relationship between corruption and political stability, understood as the likelihood of the incumbent being able to implement his preferred policies over time. We propose a model driven by two effects: The horizon effect, according to which more instability leads the incumbent to be more corrupt during his short window of opportunity; and the demand effect, by which the private sector is more willing to bribe more stable incumbents. The former effect dominates for low values of stability, since firms are unwilling to pay high bribes, but the latter effect prevails in highly stable regimes. This U-shaped pattern is confirmed by the cross-country evidence as well as several case studies: Countries or political regimes with very high or very low levels of stability display higher corruption, when compared to those in an intermediate range of stability. We also find evidence that corruption is U-shaped with respect to the size of government, confirming one of the corollaries of our model.