The Impact of Recentralization Reform on Corruption: Evidence from a Quasi-Natural Experiment

Abstract

How does government recentralization reform affect corruption? We utilize the pilot recentralization reform that transforms the legislative function, power, and responsibility of the district-level authorities to the higher level of the government organ in Vietnam as a quasi-natural experiment to address the aforementioned question. We find strong evidence that recentralization reform leads to lower corruption. The result illustrates that, among the firms which have the highest probability of making a bribe pay- ment, those incorporated in jurisdictions experiencing the recentralization reform are 4.3% less likely to pay a bribe. In addition, the perception that bribery is a common and necessary practice is also significantly lowered in the post- recentralization period. We further show that the impact of recentralization is stronger for firms which lack a political connection. Overall, these results shed light on the real impact of the government recentralization reform and also the determinants of corruption, thereby providing important policy implications for policymakers to create a more conducive business environment.

Keywords: recentralization, experiment, decentralization, economics, law, corruption