Can Resource Windfalls Reduce Corruption? The Role of Term Limits

Abstract

We find that, in democratic regimes with unlimited reelection, the answer to the question posed above is in the affirmative, contrasting a widely held view. The reason is that resource windfalls increase future graft prospects, motivating opportunistic incumbents to postpone their planned embezzlement, which in turn requires them to seek reelection and behave well in order to increase the reelection chances. Term limits mitigate, and may even reverse, this effect directly, by forcing incumbents that otherwise would seek reelection to step down, and indirectly, by increasing the potential graft that induces incumbents to seek reelection. We test the model's predictions using a panel of U.S. states over the period 1976-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits, and geographically-based cross-state differences in natural resource endowments. Our baseline estimates point at a sizeable impact. We find that a one standard deviation increase in resource windfalls decreases the average corruption level in states with no term limits by 15%, but increases average corruption in states with term limits by 8%. These results suggest that the nature of political institutions is important for understanding the nexus between resource windfalls and corruption.