Do Public Fund Windfalls Increase Corruption? Evidence from a Natural Disaster

59 Pages Posted: 21 Mar 2016

See all articles by Elena Nikolova

Elena Nikolova

Central European Labour Studies Institute (CELSI); University College London - School of Slavonic and East European Studies; IOS Regensburg

Nikolay Marinov

University of Houston - Department of Political Science

Date Written: December 31, 2015

Abstract

We show that unexpected financial windfalls increase corruption in local government. Our analysis uses a unique data set on flood-related transfers, and the associated spending infringements, which the Bulgarian central government distributed to municipalities following torrential rains in 2004 and 2005. We build an index of corruption using information from the publicly available audit reports, and exploit the quasi-random nature of the rainfall shock (conditional on controls for ground flood risk) to isolate exogenous variation in the amount of funds received by each municipality. Our results imply that a 10% increase in the per capita amount of disbursed funds leads to a 9.8% increase in corruption. We also present suggestive evidence that more corrupt mayors anticipated punishment by voters and dropped out of the next election race. Our results highlight the governance pitfalls of non-tax transfers, such as disaster relief or assistance from international organizations, even in moderately strong democracies.

Keywords: corruption, natural disasters, governance

JEL Classification: D73, H71, P26

Suggested Citation

Nikolova, Elena and Marinov, Nikolay, Do Public Fund Windfalls Increase Corruption? Evidence from a Natural Disaster (December 31, 2015). Available at SSRN: https://ssrn.com/abstract=2747753 or http://dx.doi.org/10.2139/ssrn.2747753

Elena Nikolova (Contact Author)

Central European Labour Studies Institute (CELSI) ( email )

Zvolenská 29
Bratislava, 82109
Slovakia

University College London - School of Slavonic and East European Studies ( email )

Malet Street
London WC1E 7HU
United Kingdom

IOS Regensburg ( email )

Landshuter Str. 4
Regensburg, 93047
Germany

Nikolay Marinov

University of Houston - Department of Political Science ( email )

TX 77204-3011
United States

HOME PAGE: http://www.nikolaymarinov.com

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