Francisco Espinosa, Corruption and Political Turnover over the Business Cycle: Theory and Evidence

Job talk. Francisco Espinosa is a PhD candidate at NYU. He will present a paper entitled "Corruption and Political Turnover over the Business Cycle: Theory and Evidence"

Photo of Francisco Espinosa

Photo: Francisco Espinosa.

Abstract

I study how GDP shocks affect corruption and political turnover, both from a theoretical and an empirical perspective. The theoretical setting presumes politicians are heterogeneous and privately informed about their degree of corruptibility. They face exogenous shocks to GDP, which affect appropriable government revenues. The political incentives to appropriate these rents systematically vary with such shocks, which affects the endogenous re-election/replacement decisions of voters. I predict that transitory output shocks that lie above trend represent a good opportunity to grab rents today - current gains increase relative to ex- pected continuation values. Therefore, corruption is predicted to be pro-cyclical, as is subsequent political turnover. This has the further implication that booms in current mandates decrease corruption in future mandates, because voters eliminate the more corrupt incumbents. I test these three predictions using an annual panel of countries over 1985-2011. I fi nd evidence in support of the theory. Moreover, these cyclical properties are stronger for more democratic countries, suggesting electoral accountability is indeed the bridge that links corruption to business cycles.

Read the paper [pdf]

Host: Kalle Moene

Published Jan. 28, 2019 3:18 PM - Last modified Feb. 4, 2019 2:16 PM