Corruption and Policy: Back to the Roots

Abstract

Corruption is now recognized to be a pervasive phenomenon that can seriously jeopardize the best-intentioned reform efforts. Economists in the field of industrial organization, antitrust and regulation have long recognized certain institutional factors as potent determinants of corruption, opportunistic behavior and "capture" of government officials. Only now are these relationships becoming conventional wisdom among specialists of economies in transition. This paper presents an analytical framework for examining the role basic market institutions play in rent-seeking and illicit behavior. Using data only recently available on the incidence of corruption and institutional development across an array of transition economies, the paper provides preliminary evidence on the link between the development of market institutions and incentives for corruption. The empirical results suggest that high barriers to new business entry and soft budget constraints on incumbent firms are particularly important institutional factors engendering opportunities for corruption. The findings also support the notion that economic development and maturation of democratic processes both temper corruption, as does, to a lesser extent, openness to international trade.