Resource windfall and corruption : evidence from a natural expirement in Peru.

Abstract

The relationship between economic conditions and corruption has been subject of an intense discussion in the empirical literature due to the lack of good quality data on objective measures of corruption and the presence of omitted variables, measurement error and reverse causality problems. Using a rich and novel dataset that includes a complete set of bribery‐related questions for the period 2002‐2006, I exploit an exogenous variation in the economic conditions of a set of mineral‐rich local governments in Peru which is due to an interaction between a fiscal rule that forces the central government to allocate 50% of the income taxes paid by mining companies to these governments and the extraordinary rise of the international prices of mineral resources observed since 2003. Using different empirical strategies, I find that, after the increase of prices of mineral resources, the predicted probability of being asked to pay a bribe by a local public official reduces by 1.5‐1.8 percentage points in districts with access to this type of transfers, being the effect larger in mineral producer districts (2.7 percentage points). This represents a 52‐62% reduction on the average probability. However, when focusing in areas most benefited from the positive shock of mineral prices, I find a positive effect on corruption with an increase in the former predicted probability of 4.3 percentage points. Taken together, these results suggest that the increase of transfers due to positive shocks in mineral prices have differential effects on corruption depending on the magnitude of the shock in local government revenues.