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Public Choice

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01.01.2014

Can corruption foster regulatory compliance?

verfasst von: Fabio Méndez

Erschienen in: Public Choice | Ausgabe 1-2/2014

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Abstract

The legal and economic literatures overwhelmingly support the notion that regulatory compliance is always less in the presence of corruption. This paper departs from those literatures and shows that, whenever public officials are paid fixed wages, an increase in corruption may actually foster compliance. The conditions that make this possible are laid down in a theoretical model. Empirical evidence that corroborates the theoretical findings is provided using firm-level data for 26 transition economies.

Vorheriger Artikel Do intergovernmental grants create ratchets in state and local taxes?

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There is a parallel literature that examines the effects of corruption on unofficial economic activity (Johnson et al. 2000; Friedman et al. 2000). Although related, the size of the unofficial economy and the degree of regulatory compliance do not necessarily go hand in hand when corruption is present and, thus, these other empirical studies are not directly comparable to the one presented here.

The assumed structure of a fixed penalty α combined with a fixed and proportional cost of regulations (\(\bar{r}+rR_{i}\)) simplifies the mathematics and facilitates comparison with economies where proportional fees are not used. It also allows the model to match the empirical observation that smaller firms pay larger bribes as a percentage of revenue (ERBD 1999; Safavian et al. 2001). It can be verified, however, that the results of the paper remain unaltered when the penalties take a more general form that includes an additional proportional term (as in α+λR _i).

An alternative scenario in which firms risk having to pay an extortive bribe even if they comply with the regulations is studied in a web appendix that complements this paper (http://comp.uark.edu/~fmendez/Research.html). This variation constitutes an important extension of the model, but does not alter the qualitative results.

The algebraic steps needed to solve this system, as well as the conditions that guarantee the existence of an internal solution, can be found in the web appendix that complements this paper (http://comp.uark.edu/~fmendez/Research.html).

See Méndez and Sepúlveda (2010) for a discussion on the difficulties of using alternative corruption measures to settle a question. See Mookherjee and Png (1995) for an alternative model in which an increase in the value of the bribe generates an ambiguous effect on compliance.

The literature on tax compliance concentrates mostly on personal income and corporate taxation (see, for example, Feinstein 1991; Das-Gupta et al. 1995; or Sanyal et al. 2000). Only a few studies have examined compliance with sales taxes at the firm level and only for certain states within the United States (Tennesse in the paper by Murray 1995 and New Mexico in that of Alm et al. 2004).

As discussed before, the variables used in the market level regressions are the result of market aggregations wherein the number of firms in each market is not identical. This aggregation of the data might introduce some heteroscedasticity, which could compromise the validity of the t-statistics. This potential problem is addressed by computing heteroscedasticity-robust standard errors that allow one to make valid statistical inferences.

As pointed out by an anonymous referee, it is possible that the positive correlation between corruption and compliance could be the result of complying firms that over-report corruption with the intention of raising awareness and potentially gaining at the expense of their corrupt competitors. With the data at hand, however, it is difficult to determine whether such type of over-reporting is actually taking place.

The second instrument used in the market-level regressions (the frequency with which firms had to pay bribes for any reason) did not prove to be a valid instrument at the firm level.

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Titel: Can corruption foster regulatory compliance?
verfasst von: Fabio Méndez
Publikationsdatum: 01.01.2014
Verlag: Springer US
Erschienen in: Public Choice / Ausgabe 1-2/2014
Print ISSN: 0048-5829
Elektronische ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-012-9958-4

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