Delegation of Regulation and Perceived Corruption in South Africa

Abstract

I investigate the drivers of a reduction in the discretionary power of environmental inspectors and the impact that such reduction has on firms’ perceptions. I examine the transition from the Air Pollution Protection Act of 1965 to the Air Quality Act of 2005 (AQA), a change from full to partial delegation of regulation in South Africa. By constructing a principal-agent model, I propose a theoretical explanation for why a society would restrict inspectors’ discretionary power. I use my model to discuss the air quality regulation transition in South Africa. I suggest that the transition might have occurred because of increases in inspectors’ rent-seeking motivation and appropriating rents after the end of Apartheid. Using microdata, I run diff-in-diffs models in a two-period panel with 191 South African firms to show that the implementation of the AQA decreases affected firms’ perceived corruption.

Keywords: Delegation of Regulation, Perceived Corruption, Developing countries, South Africa