Abstract
I examine the relationship between democracy and the perceived risk of corruption in a panel of 130 countries. My panel model controls for country fixed effects and enables the estimation of a within-country relationship between democracy and corruption. My main finding is that democracy significantly reduces the risk of corruption, but only in countries where ethnic fractionalization is low. In strongly fractionalized countries a transition from autocracy to democracy does not significantly reduce corruption. One explanation for these findings is that the corruption-reducing effect of greater accountability of politicians under democracy is undermined by the common pool problem; fractionalization increases the severity of the common pool problem.
Highlights
To explore empirically and quantify the link between democracy, ethnic fractionalization, and corruption I estimate the following econometric model: Corruption c,t = αc + βc *t + γt + θ1 Democracyc,t− 1 + θ2 Democracyc,t− 1 *Fracc + εc,t where αc are country fixed effects, βc *t are country-specific time trends, and γt are year fixed effects. εc,t is an error term that is clustered at the country level to allow for arbitrary serial correlation
Note that democracy enters with a one-year lag and the identifying assumption made is that future changes in corruption do not have systematic effects on current political institutions
Column (1) of Table 3 shows estimates of the effect that the polity2 score has on corruption, obtained from a pooled panel regression which does not control for timeinvariant country unobservables
Summary
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