Public Sector Corruption and Trust in the Private Sector

Gillanders, Robert and Neselevska, Olga (2016): Public Sector Corruption and Trust in the Private Sector.

Abstract

In this paper we use data from the Afrobarometer surveys to demonstrate that there is an undesirable spill-over from petty corruption in the public sector to trust in private sector institutions. Our results show that experiencing bribery in the course of one’s interactions with the public sector lowers one’s trust in big private corporations, small businesses, and local traders. This finding holds even when we allow for perceptions of political corruption to enter the specification. We do not find any significant association between a measure of interpersonal trust and bribery experience which suggests that our findings with regards to market institutions are not driven by corruption lowering trust in general. Having to pay a bribe for household services, which is perhaps the setting most like a private sector transaction, is the corrupt interaction most strongly associated with the decline in private sector trust. We find some evidence that the spill-over is larger in democracies than in non-democratic regimes. Given the importance of trust in market institutions for the efficient functioning of an economy, our findings thus point to a previously unknown and potentially substantial cost of corruption and add to the case for anti-corruption efforts.

• Item Type: MPRA Paper
• Language: English
• Keywords: bribery, corruption, corruption experiences, corruption perceptions, private sector trust, sub-Saharan Africa, trust
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

References

Adams, J.E., Highhouse, S. and Zickar, M.J., 2010. Understanding General Distrust of Corporations. Corporate Reputation Review, 13(1), pp. 38-51.

Afrobarometer Data, Rounds 2 and 3, available at http://www.afrobarometer.org

Aghion, P., Algan, Y., Cahuc, P., & Shleifer, A. (2010). Regulation and Distrust. The Quarterly journal of economics, 125(3), 1015-1049.

Aidt, T., Dutta, J., & Sena, V. (2008). Governance regimes, corruption and growth: Theory and evidence. Journal of Comparative Economics, 36(2), 195-220.

Alesina, A. and La Ferrara, E., 2002. Who trusts others? Journal of Public Economics, 85, pp. 207-234.

Anderson, C. J., & Tverdova, Y. V. (2003). Corruption, political allegiances, and attitudes toward government in contemporary democracies. American Journal of Political Science, 47(1), 91-109.

Armah-Attoh, D., Gyimah-Boadi, E. and Chikwanha, A.B., 2007. Corruption And Institutional Trust In Africa: Implications For Democratic Development. Afrobarometer working paper No. 81. Cape Town: IDASA POS.

Banerjee, R., 2015. Corruption, Norm Violation and Decay in Social Capital. Aarhus University Economics Working Papers 2015-05. Denmark.

Bergh, A., & Bjørnskov, C. (2014). Trust, welfare states and income equality: Sorting out the causality. European Journal of Political Economy, 35, 183-199.

Bjørnskov, C., 2007. Determinants of generalized trust: A cross-country comparison. Public Choice, 130, pp. 1-21.

Bjørnskov, C., & Méon, P. G. (2015). The productivity of trust. World development, 70, 317-331.

Blanco, L. (2013). The impact of crime and insecurity on trust in democracy and institutions. The American Economic Review, 103(3), 284-288.

Breen, M. and Gillanders, R., 2012. Corruption, Institutions and Regulation. Economics of Governance, 13(3), pp. 263-285.

Breen, M. and Gillanders, R., 2015. Political Trust, Corruption and Ratings of the IMF and the World Bank. International Interactions, 41(2), pp. 337-364.

Brehm, J. and Rahn, W., 1997. Individual level evidence for the causes and consequences of social capital. American Journal of Political Science, 41, pp. 999-1023.

Chang, E. C., & Chu, Y. H. (2006). Corruption and trust: exceptionalism in Asian democracies?. Journal of Politics, 68(2), 259-271.

Coleman, J., 1990. Foundations of Social Theory. Cambridge, Massachusetts: Harvard University Press.

Corbacho, A., Philipp, J., & Ruiz-Vega, M. (2015). Crime and erosion of trust: Evidence for Latin America. World Development, 70, 400-415.

Daniele, G., & Geys, B. (2015). Interpersonal trust and welfare state support. European Journal of Political Economy, 39, 1-12.

Dirks, K.T. and Ferrin, D.L., 2002. Trust in Leadership: Meta-Analytic Findings and Implications for Research and Practice. Journal of Applied Psychology, 87(4), pp. 611-628.

Dearmon, J., & Grier, R. (2011). Trust and the accumulation of physical and human capital. European Journal of Political Economy, 27(3), 507-519.

Den Butter, F. A., & Mosch, R. H. (2003). The Dutch miracle: Institutions, networks, and trust. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft, 362-391.

Djankov, S., McLiesh, C., & Ramalho, R. M. (2006). Regulation and growth. Economics Letters, 92(3), 395-401.

Dohmen, T., Falk, A., Huffman, D. and Sunde, U., 2008. Representative Trust and Reciprocity: Prevalence and Determinants. Economic Inquiry, 46(1), pp. 84-90.

Donaldson, T. and Preston, L.E., 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review, 20(1), pp. 65-91.

Dreher A, Gassebner M (2011) Greasing the wheels? The impact of regulations and corruption on firm entry. Public Choice 1–20.

Fisman, R., & Svensson, J. (2007). Are corruption and taxation really harmful to growth? Firm level evidence. Journal of Development Economics, 83(1), 63-75.

Georgarakos, D., & Pasini, G. (2011). Trust, sociability, and stock market participation.Review of Finance, 15(4), 693-725.

Gillanders, R., & Whelan, K. (2014). Open For Business? Institutions, Business Environment and Economic Development. Kyklos, 67(4), 535-558.

Glaeser, E.L., Laibson, D., Scheinkman, J.A. and Soutter, C.L., 1999. What is Social Capital? The Determinants of Trust and Trustworthiness. National Bureau of Economic Research Working Paper No. 7216. Cambridge: NBER.

Guiso, L., Sapienza, P., & Zingales, L. (2008). Trusting the stock market. The Journal of Finance, 63(6), 2557-2600.

Guriev, S. (2004). Red tape and corruption. Journal of Development Economics, 73(2), 489-504.

Heinemann, F., & Tanz, B. (2008). The impact of trust on reforms. Journal of Economic Policy Reform, 11(3), 173-185.

Huntington S (1968) Political order in changing societies. Yale University Press, New Haven

Ingenhoff, D. and Sommer, K., 2010. Trust in Companies and in CEOs: A Comparative Study of the Main Influences. Journal of Business Ethics, 95, 339-355.

Klein, G. and Shtudiner, Z., 2015. Trust in others: does it affect investment decisions? Quality & Quantity, 07/2015, pp. 1-19.

Kuenzi, M.T., 2008. Social Capital and Political Trust in West Africa. Afrobarometer working paper No. 96.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W., 1997. Trust in Large Organizations. American Economic Review, 87, pp. 333-338.

Lavallée, E., Razafindrakoto, M. and Roubaud, F., 2008. Corruption and Trust in Political Institutions in sub-Saharan Africa. Afrobarometer working paper No. 102.

Leibrecht, M., & Pitlik, H. (2015). Social trust, institutional and political constraints on the executive and deregulation of markets. European Journal of Political Economy, 39, 249-268.

Marshall, M.G. (2013). Polity IV Project: Political Regime Characteristics and Transitions, 1800-2011.

Méon PG, Weill L (2010) Is corruption an efficient grease? World Dev 38(3):244–259

Mohtadi, H., & Roe, T. L. (2003). Democracy, rent seeking, public spending and growth. Journal of Public Economics, 87(3), 445-466.

Morris, S. D., & Klesner, J. L. (2010). Corruption and trust: Theoretical considerations and evidence from Mexico. Comparative Political Studies, 43(10), 1258-1285.

Peiró-Palomino, J., & Tortosa-Ausina, E. (2013). Can trust effects on development be generalized? A response by quantile. European Journal of Political Economy, 32, 377-390.

Pinotti, P. (2012). Trust, regulation and market failures. Review of Economics and Statistics, 94(3), 650-658.

Putnam, R., 1993. Making democracy work: civic tradition in modern Italy. Princeton: Princeton University Press.

Raiser, M., Rousso, A., Steves, F., & Teksoz, U. (2008). Trust in transition: Cross-country and firm evidence. Journal of Law, Economics, and Organization, 24(2), 407-433.

Rock, M. T. (2009). Corruption and democracy. Journal of development studies, 45(1), 55- 75.

Seligson, M. A. (2002). The impact of corruption on regime legitimacy: A comparative study of four Latin American countries. The journal of Politics, 64(02), 408-433.

Torgler, Benno. 2008. "Trust in international organizations: An empirical investigation focusing on the United Nations." The Review of International Organizations 3 (1):65-93.

Tu, Q., & Bulte, E. (2010). Trust, market participation and economic outcomes: Evidence from rural China. World Development, 38(8), 1179-1190.

Williamson, O.E., 1985. The economic institutions of capitalism. New York, NY: Free Press.

Yamamura, E., 2008. Determinants of trust in a racially homogeneous society. Economics Bulletin, 26(1), pp. 1-9.

Zak, P.J. and Knack, S., 2001. Trust and Growth. The Economic Journal, 111, pp. 295-321