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WP 2014: 10

Devolutionary delusions? The effect of decentralization on corruption. Ivar Kolstad, Vincent Somville and Arne Wiig

Chr. Michelsen Institute (CMI) is an independent, non-profit research institution and a major international centre in policy-oriented and applied development research. Focus is on development and human rights issues and on international conditions that affect such issues. The geographical focus is Sub-Saharan Africa, Southern and Central Asia, the Middle East and Latin America. CMI combines applied and theoretical research. CMI research intends to assist policy formulation, improve the basis for decision-making and promote public debate on international development issues.

Devolutionary delusions? The effect of decentralization on corruption*

Ivar Kolstad,** Vincent Somville∗∗∗ and Arne Wiig∗∗∗∗ Chr. Michelsen Institute, Norway

WP 2014 : 10 August 2014

                                                Keywords:  Decentralization, corruption, bribery, accountability, capture   JEL codes: D73, H11, H77

Contents Abstract  .........................................................................................................................................................  iv   1   Introduction  .............................................................................................................................................  1   2   Relation  to  the  literature  ..........................................................................................................................  2   3   Empirical  strategy  and  data  ......................................................................................................................  7   4   Results   ...................................................................................................................................................  12   5   Conclusion  ..............................................................................................................................................  15   References  ....................................................................................................................................................  16   Appendix  ......................................................................................................................................................  19    

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Abstract The effect of government decentralization on corruption is theoretically ambiguous. On the one hand, bringing government closer to the people could increase accountability and reduce corruption. On the other hand, decentralization could increase local capture and uncoordinated bribe taking across government levels. This paper estimates the effect of decentralization on experienced corruption, using individual-level bribery data from 36 countries. Crucially, we distinguish between the effect of decentralization on the frequency of contact with public officials, and its effect on the probability that a bribe is paid given contact. To identify the causal effect, we use an original instrument based on countries’ climatic heterogeneity. The results show that decentralization increases contact with officials, but there is no significant effect on the propensity to pay bribes given contact. We hence find no evidence that decentralization increases accountability. Moreover, higher aggregate corruption in decentralized societies is at least partly due to greater interaction with public officials, and not necessarily due to greater local capture.

* The authors thank Odd-Helge Fjeldstad, Debapriya Bhattacharya and Carol Newman for comments, Transparency International for providing data, and the Norwegian Ministry of Foreign Affairs for financial support. ** Corresponding author. Chr. Michelsen Institute, P.O. Box 6033 Bedriftssenteret, N-5892 Bergen, Norway. Phone: +47 47 93 81 22. Fax: +47 55 31 03 13. E-mail: [email protected] ***Chr. Michelsen Institute, P.