Instability and the Incentives for Corruption

Abstract

We investigate the relationship between corruption and political stability, from both theoretical and empirical perspectives. We propose a model of incumbent behavior that is driven by the interplay of two effects: A horizon effect, whereby greater instability leads the incumbent to embezzle more during his short window of opportunity; and a demand effect, by which the private sector is more willing to bribe more stable incumbents. The horizon effect dominates at low levels of stability, since firms are unwilling to pay high bribes and unstable incumbents have strong incentives to embezzle, whereas the demand effect gains salience in more stable regimes. Together, these two effects generate a non-monotonic, U-shaped relationship between total corruption and stability. On the empirical side, we find a robust U-shaped pattern between country indices of corruption perception and various measures of incumbent stability, including historically-observed average tenures and the legislative majority of the chief executive: Regimes that are very stable or very unstable display higher levels of corruption when compared to those in an intermediate range of stability.

Keywords: Corruption, Political Stability, Incumbent Tenure

JEL Classification: D72, E62, K4, O11