Inter-governmental political relations in a federation and illegal mining of natural resources

Abstract

The paper studies the impact of inter-governmental political relations on illegal resource extraction in a federal setup. In a stylized model, a corruptible sub-national politician accepts bribes from a private miner to allow under-reporting of mineral extraction and evasion of royalty payment. The probability that a mine is audited by a national audit agency increases with the extent of illegal mining. In addition, when the audit agency is politicized, the probability of audit declines with the political weight of the politician in the ruling national coalition government. We find that there is an endogenous threshold political weight beyond (below) which greater politicization of the audit agency leads to higher (lower) illegal mining. The threshold weight increases with the rate of fine on royalty evasion but decreases with the rate of royalty itself. The model also suggests that there is no unambiguous relationship between economic distortions in the form of illegal mining and the degree of rent extraction through bribes. As the audit agency becomes more politicized, the possibility of higher illegal mining but lower bribes or lower illegal mining but higher bribes cannot be ruled out.