Corruption, Governance, and Public Pension Funds

Abstract

We examine the effects of state corruption as well as political and governance factors on public pension funds. We find that pension funds in more corrupt states have lower performance; a one standard deviation increase in corruption is associated with a decrease in annual returns between 17 and 25 basis points, and this relation is robust to state-level and pension-level fixed effects. Pensions located in more corrupt jurisdictions also invest a larger fraction of their assets in equities. We find that having a new treasurer decreases the negative effects of corruption, suggesting that frequent changes in administrations are beneficial in corrupt jurisdictions. Governance-related variables and political affiliation variables are by themselves not significantly related to pension returns, although these variables are associated with differences in asset allocation.