Red tape, bribery and government favouritism: evidence from Europe

Mihály Fazekas

doi:10.1007/s10611-017-9694-2

Abstract

Red tape has long been identified as a major cause of corruption, hence deregulation was advocated as an effective anticorruption tool, an advice which many country followed. However, we lack robust systematic evidence on whether deregulation actually lowers corruption. This is partially due to the difficulty of defining what is good regulation, but also to the lack of theoretical clarity about which type of corruption regulations impact on and to the deficient measurement of different types of corruption. In order to address the latter two gaps, we differentiate petty corruption from government favouritism and propose novel measurement of the latter by developing two objective proxy measures of favouritism in public procurement: single bidding in competitive markets and a composite score of tendering ‘red flags’. Using publicly available official electronic records of over 2.5 million government contracts in 27 EU member states and two European Economic Area countries in 2009–2014, we directly operationalize a common definition of favouritism: unjustified restriction of access to public contracts to favour a certain bidder. Petty corruption is measured using business surveys while the extent of business regulation is measured by Doing Business expert assessment of precise regulatory costs. Using country-level panel regression analysis, we find that deregulation has a heterogeneous impact on both low and high level corruption. It is largely ineffective in tackling government favouritism, with business start-up deregulation even facilitating such corruption. Whereas deregulating the various channels through which governments and businesses interact (e.g. obtaining construction permits) often decreases the perception of bribery and petty corruption. Policy consequences are profound and point at a more targeted and context-dependent promotion of the deregulation agenda. Full public procurement database is available at http://digiwhist.eu/resources/data/.

Highlights

Red tape or burdensome regulation has long been identified as a major cause for corruption, featuring as central in the earliest corruption literature already [1]
It can be argued that both corruption proxies capture the simplest and most straightforward signs of competition restriction, they miss out on sophisticated types of corruption such as corruption combined with inter-bidder collusion. This is problematic in as much as corruption is frequently combined with collusive bidding as for example extensive market transparency and high entry costs encourage cartels [41, 42]. As both corruption proxies can be associated with non-corrupt phenomena, we look at external validity tests to demonstrate that they are more often linked to government favouritism than other behaviours
Where Corr is a measure of corruption either petty or grand in country i in year t, which will take two alternative forms for each type of corruption: for petty corruption it is either the World Economic Forum or Institute for Management Development survey scores; for government favouritism, it is either the average ratio of tenders for which only one bidder submitted an offer (Single Bidder), or the more comprehensive corruption risk measure incorporating tendering red flags (CRI)

Summary

Introduction

Red tape or burdensome regulation has long been identified as a major cause for corruption, featuring as central in the earliest corruption literature already [1]. The simplest such test is comparing objective corruption proxies with corruption perceptions which provides a strong support to our interpretation of the data, as for example business executives perceptions of government favouritism in awarding public contracts is strongly correlated with both objective proxies: linear correlation coefficients range between 0.6–0.7 for a sample of European countries [40].

Results

Conclusion