The Effect of Income on Corruption Brittni Smith Department of Economics and Management Hood College April 16, 2010
Corruption <ul><li>Misuse of public power for personal or private gain </li></ul><ul><li>Examples </li></ul><ul><ul><ul><l...
Corruption <ul><li>Seminal Work by Mauro (1995)  </li></ul><ul><ul><li>Consequence of corruption is lower investment which...
Countries in Corruption Index New  Zealand 0.6 Somalia 8.9 Least Corrupt Most Corrupt Spain 2.5 USA China Mexico Russia Ha...
Corruption Index <ul><li>Source: Transparency International   World Bank </li></ul><ul><li>Perceived level of corruption i...
Previous Studies on the  Effect of Income on Corruption Frechette (2006) Braun-Di Tella (2004) Treisman (2000)  Brown (200...
Fixed-Effects <ul><li>Focus:  time-varying  factors of corruption </li></ul><ul><ul><li>Ex) Income, education, etc. </li><...
Endogeneity <ul><li>Income is endogenous with corruption </li></ul><ul><li>Causal relationship  </li></ul><ul><li>Directio...
Frechette (2006) <ul><li>ICRG index  </li></ul><ul><li>Fixed-effects specification  </li></ul><ul><li>Accounts for this en...
Explanatory Variables <ul><li>(-) Income </li></ul><ul><ul><ul><ul><li>Real GDP per capita </li></ul></ul></ul></ul><ul><l...
Instrument Variable <ul><li>Instrument should be correlated with income but should not directly effect corruption </li></u...
<ul><li>Isolate endogenous variable </li></ul><ul><li>Instrument to be statistically significant </li></ul><ul><li>F stati...
Non-Linear Relationship Between Corruption and Income Bangladesh Luxembourg
Model <ul><li>Specifies non-linear relationship between income and corruption </li></ul><ul><li>Two-Stage Least Squares wi...
Sub-Sample Income Levels
Various Income Levels ***, **, * indicate statistical significance at the  1%, 5%, and 10% level respectively Standard err...
Conclusions <ul><li>Non-linear relationship between income and corruption </li></ul><ul><li>Subsample reveals as income in...
Summary <ul><li>Clearly shows as income increases corruption decreases </li></ul><ul><ul><li>Opposite of Frechette (2006)....
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Honors Presentation 4 10[1]

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This was an honors presentation I gave to the public during the my senior year at Hood College.

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Honors Presentation 4 10[1]

  1. 1. The Effect of Income on Corruption Brittni Smith Department of Economics and Management Hood College April 16, 2010
  2. 2. Corruption <ul><li>Misuse of public power for personal or private gain </li></ul><ul><li>Examples </li></ul><ul><ul><ul><li>Former Governor of Illinois Rod Blagojevich: auctioning off President Obama’s Senate seat </li></ul></ul></ul><ul><ul><ul><li>In 2009, China has convicted 106,000 officials for corruption </li></ul></ul></ul><ul><ul><ul><ul><li>Senior official accused of taking $500,000 dollars in bribes from businesses seeking approval of projects. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Former vice president of China’s highest court was jailed for life for bribes totaling $600,000 </li></ul></ul></ul></ul>
  3. 3. Corruption <ul><li>Seminal Work by Mauro (1995) </li></ul><ul><ul><li>Consequence of corruption is lower investment which decreases development </li></ul></ul><ul><li>President of the World Bank Jim Wolfensohn, </li></ul><ul><ul><li>“ Let’s not mince words, we need to deal with the causes of corruption.” (1996) </li></ul></ul><ul><li>Today considered to be one of the biggest obstacles to economic development. </li></ul>
  4. 4. Countries in Corruption Index New Zealand 0.6 Somalia 8.9 Least Corrupt Most Corrupt Spain 2.5 USA China Mexico Russia Haiti Afghanistan 7.8 6.7 6.4 8.2 8.7 S. Korea 4.5 4
  5. 5. Corruption Index <ul><li>Source: Transparency International World Bank </li></ul><ul><li>Perceived level of corruption in a country </li></ul><ul><li>Based on poll-of-polls data from: </li></ul><ul><ul><li>Experts and business persons in the country and abroad </li></ul></ul><ul><ul><li>Independent, reputable institutions </li></ul></ul><ul><ul><ul><li>Ex) World Bank </li></ul></ul></ul><ul><li>Available from 1995-present for 178 countries. </li></ul><ul><ul><li>Panel data: for each country there are 14 observations, total of 2,492 observations. </li></ul></ul>
  6. 6. Previous Studies on the Effect of Income on Corruption Frechette (2006) Braun-Di Tella (2004) Treisman (2000) Brown (2005), Kunicova-R. Ackerman (2005), Lederman (2005), Chang-Golden (2004), Damania (2004), Dreher (2004), Alt-Lassen (2003), Brunett-Weder (2003), Graeff-Mehlkop (2003), Herzfeld-Weiss (2003), Knack-Azfar (2003) Person (2003), Tavares (2003), Fisman-Gatti (2002), Paldam (2001), Bonanglia(2001), Swamy (2001), Abed-Davoodi (2000), Rauch-Evan (2000), Wei (2000), Goldsmith (1999), Ades-Di Tella (1997) Income Positive-Significant Negative-Significant Variable
  7. 7. Fixed-Effects <ul><li>Focus: time-varying factors of corruption </li></ul><ul><ul><li>Ex) Income, education, etc. </li></ul></ul><ul><li>Error term of model accounts for: </li></ul><ul><ul><li>Time-invariant factors that could effect corruption </li></ul></ul><ul><ul><ul><li>Ex) Colonization, religion, geography and could affect corruption </li></ul></ul></ul><ul><ul><li>Country unobservables </li></ul></ul><ul><ul><ul><li>Could be correlated and potentially fostering corruption </li></ul></ul></ul><ul><ul><ul><li>Accounting for the unaccountable </li></ul></ul></ul>
  8. 8. Endogeneity <ul><li>Income is endogenous with corruption </li></ul><ul><li>Causal relationship </li></ul><ul><li>Direction of causation is not clear </li></ul><ul><ul><li>Do low income countries generate more corruption? </li></ul></ul><ul><ul><li>Does corruption makes countries poorer? </li></ul></ul>
  9. 9. Frechette (2006) <ul><li>ICRG index </li></ul><ul><li>Fixed-effects specification </li></ul><ul><li>Accounts for this endogenous relationship </li></ul><ul><li>Main findings: </li></ul><ul><ul><li>Income increases corruption </li></ul></ul><ul><ul><li>Education increases corruption </li></ul></ul>
  10. 10. Explanatory Variables <ul><li>(-) Income </li></ul><ul><ul><ul><ul><li>Real GDP per capita </li></ul></ul></ul></ul><ul><li>(-) Education </li></ul><ul><ul><ul><ul><li>Number of pupils in primary school </li></ul></ul></ul></ul><ul><li>(-) Share of Imports in GDP </li></ul><ul><ul><ul><ul><li>Merchandise trades as % of GDP </li></ul></ul></ul></ul><ul><li>(+) Fuel, Ore, and Mineral Exports </li></ul><ul><ul><ul><ul><li>% of Merchandise exports </li></ul></ul></ul></ul><ul><li>(-) Internet </li></ul><ul><ul><ul><ul><li>Number of Users </li></ul></ul></ul></ul>
  11. 11. Instrument Variable <ul><li>Instrument should be correlated with income but should not directly effect corruption </li></ul>Income OECD Trading Partner's Income Haiti U.S. Corruption
  12. 12. <ul><li>Isolate endogenous variable </li></ul><ul><li>Instrument to be statistically significant </li></ul><ul><li>F statistic >10 </li></ul>First Stage Regression
  13. 13. Non-Linear Relationship Between Corruption and Income Bangladesh Luxembourg
  14. 14. Model <ul><li>Specifies non-linear relationship between income and corruption </li></ul><ul><li>Two-Stage Least Squares with: </li></ul><ul><ul><li>Panel Data </li></ul></ul><ul><ul><li>Fixed-Effects </li></ul></ul><ul><ul><li>Instrument Variable </li></ul></ul>
  15. 15. Sub-Sample Income Levels
  16. 16. Various Income Levels ***, **, * indicate statistical significance at the 1%, 5%, and 10% level respectively Standard errors in parenthesis
  17. 17. Conclusions <ul><li>Non-linear relationship between income and corruption </li></ul><ul><li>Subsample reveals as income increases, corruption decreases at a decreasing rate </li></ul><ul><li>Internet reduces corruption for countries with income above $18,000. </li></ul>
  18. 18. Summary <ul><li>Clearly shows as income increases corruption decreases </li></ul><ul><ul><li>Opposite of Frechette (2006). </li></ul></ul><ul><li>Same technique as Frechette panel data and fixed-effects method </li></ul><ul><li>Corrected for problems in past empirical research </li></ul><ul><ul><ul><li>Endogeneity of income </li></ul></ul></ul><ul><ul><ul><li>Non-linear relationship between income and corruption </li></ul></ul></ul><ul><li>Proved using this model the results is income does decrease corruption but differently with countries of different income levels. </li></ul>

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