Do public sector wages affect corruption?

Testing the fair wage hypothesis across countries and in Russia

Scientific Essay 2010 23 Pages

Politics - International Politics - Region: Russia


Table of Contents

1 Introduction
1.1 Endemic corruption
1.2 How to fight corruption: the fair-wage hypothesis

2 Literature review
2.1 Maximising vs. Satisficing
2.2 Empirical Evidence
2.3 Literature on Corruption in Russia

3 Theoretical Model
3.1 Building the model
3.2 Empirical Evidence
3.2.1 Perceived corruption: International Country Risk Guide
3.2.2 Approximating actual levels of corruption: Enterprise Surveys

4 Methodolgy

5 Results
5.1 Critique

6 Evidence for the fair wage hypothesis in Russia?

7 Concluding remarks

8 Bibliography

List of Tables and Figures:

Table 1: CPI 2000 - 2001

Table 2: Enterprise Survey Indicators

Table 3: Data mismatch

Figure 1: Scatterplot

1 Introduction

1.1 Endemic corruption

In his article “Go Russia!” from September 10, 2009 president Dmitry Medvedev has referred to corruption as “endemic” and named it one of three “social ills”:

“2. Centuries of corruption have debilitated Russia from time immemorial. Until today this corrosion has been due to the excessive government presence in many significant aspects of economic and other social activities. But it is not limited to governmental excess -- business is also not without fault. Many entrepreneurs are not worried about finding talented inventors, introducing unique technologies, creating and marketing new products, but rather with bribing officials for the sake of ‘controlling the flows’ of property redistribution.”(Medvedev, 2009)

This assessment is neither exclusive to president Medvedev nor is it new. Already Vladimir Ilyich Lenin has referred to bribes as one of the three enemies – along with communist swagger and illiteracy/ignorance – in October 1921 (Першин, 2007, p. 6). Today several international and national non-governmental organisations have come to the conclusion, that corruption is deeply entrenched in the political and business environment. In the 2009 Enterprise Survey conducted by the World Bank 50% of the companies have described corruption as a major business constraint(World Bank, 2010). Transparency International’s Corruption Perception Index (CPI) ranks Russia in its 2009 ranking as 146th out of 180 countries(Transparency International, 2009). Unfortunately, this is not a snapshot, but a picture, which has been painted over several years. Table 1 gives an overview of Transparency International’s CPI for Russia for the years 2000 – 2008:

Table 1: CPI 2000 - 2001

illustration not visible in this excerpt

Table 1 shows that in the past nine years Russia has never surpassed a CPI of 2.8 and was ranked consistently within the lowest 25% of the countries assessed. It can be argued, that the CPI only measures corruption, which is perceived by Transparency International’s experts, and thus it is likely to be affected by scandals such as surrounding IKEA (Nikishenkov, 2010) and that this might not be representative of everyday corruption experienced by the general public and enterprises.

Anecdotal evidence, however, shows that corruption is indeed deeply entrenched in Russia. For example, the “Independent Annual Report of the non-governmental Russian Anti-Corruption Chamber ‘Clean Hands 2009’”, published by the Association of Russian Lawyers for Human Rights(Association of Russian Lawyers for Human Rights, 2010), collected 6,589 complaints of corrupt activities in the state and regional authorities. According to this report, corruption is widespread in legal organs. Furthermore, the NGO “Information for Democracy” (INDEM) has conducted surveys 2001 and 2005, asking private people and businesses about corrupt behaviour(INDEM Foundation, 2005). The results of this survey will be discussed in more detail in section6. Other reports also have outlined the prevalence of corruption and informal payments in the police (Изюмов & Косалс, 2010), in the health sector (Bogatova, Potapchik, Chernets, Chirikova, & Shilova, 2003), and in the education sector (Леонтьева, 2008). The next step after identifiying the existence of corruption, and expressing the will to fight it, is designing policies to combat corruption.

1.2 How to fight corruption: the fair-wage hypothesis

Before turning to policies on how to fight corruption one first needs to define what corruption is. The literature on corruption offers several definitions, depending on whether the legal, political, economic or sociological aspect of corruption is described. As this paper tries to explore the relationship between wages and corruption, a rational choice view on corruption will be taken. Therefore this paper will use Rose-Ackerman’s (Rose-Ackerman, Corruption. A study in political economy., 1978) and Robert Klitgaart’s (Klitgaard, 1988) definitions of corruption. Rose-Ackerman centres her analysis of corruption on the agency relationship. In this relationship the principal, in democratic states for example the voter, has a set of preferences, which would produce a desired outcome (Rose-Ackerman, Corruption. A study in political economy., 1978, p. 6). The principal employs an agent, for example elected agency heads, ministers etc., whose task is to achieve those goals. However, as monitoring of the agents is costly, they are left with some discretion in their decisions and actions. A third party can, with a monetary payment, influence those decisions and actions to his or her favour, without the agent passing this monetary payment on to the principal.

Robert Klitgaard incorporates Rose-Ackerman’s “third party” into a principal-agent-client framework (Klitgaard, 1988, pp. 22-24). Both Rose-Ackerman (implicitly) and Klitgaard (explicitly) assume rational agents and clients, whose decision of being corrupt or not depends on the likely costs and benefits of such action. This paper will follow Rose-Ackerman’s and Klitgaard’s approach to corruption and define the phenomenon as a monetary payment made by a client to influence an agents’ decision or action to the detriment of the principal. This definition not only presupposes that corruption is generally harmful – a stance which is widely accepted in the debate in academia (Mauro, 1995), (Beets, 2005), (Rose-Ackerman, Political Corruption: Concepts and Contexts,, 2005) as well as in policy-making (Medvedev, 2009), but also it makes corruption an interesting field for students of economics by also making it a question of incentive structures.

Focusing on corruption as a principal-agent-client problem, where the agents pursue monetary interests which may be diverging from the principal’s objectives, raises the question whether the agents’ salary has an effect on corruption. More precisely, this paper seeks to analyse whether higher salaries will cause lower corruption. The intuition behind this lies in the assumption, that agents, i.e. government officials, increase their income by corrupt acts to some desired level, thus “satisficing”[2] their need by receiving a fair wage, as opposed to a maximising agent, who will collect bribes regardless of his income.

The paper is structured as follows: the next section will provide a literature overview on the relationship between corruption and wages. The following section will explain Van Rijckehem’s and Weder’s model and propose empirical changes for testing the fair-wage-hypothesis. Section 4 explaines the methodology behind the regression analysis for the cross-country analysis. Section 5 discusses the results of the regression analysis and section 6 discusses evidence for the fair wage hypothesis using data from Russia. Section 7 concludes.

2 Literature review

2.1 Maximising vs. Satisficing

Early writing supporting the fair wage hypothesis can be found in the work of Becker and Stigler (Becker & Stigler, 1974). Asking how corrupt enforcement can be avoided when the probability of detection is uncertain, the authors conclude that, raising the wages of enforcers above a level that they could earn elsewhere, given that detection would result in dismissal and thus loss of salary, would deter enforcers from engaging in corrupt acts. If the amount, by which the salary is raised, is chosen so that it decreases if the probability of detection increases and increases when the amount of the bribe increases, the difference between the public and private salary would impose a cost of dismissal. Becker and Stigler hereby assume a rational agent, who plans his behaviour according to the expected gain from a corrupt act. If the gains from a corrupt act do not outweigh the risks associated with a job loss, the enforcer will be deterred from taking bribes. The authors also place an emphasis on pensions and other reward schemes as a measure to reduce the temptation for corrupt behaviour, especially when the agent is close to retirement and therefore faces great losses when detected.


[1] The CPI scores are scaled from 0 to 10, with 10 representing the lowest level of perceived corruption.

[2] Satisficing is understood to be the pursuit of reasonable targets, rather than profit maximisation. For a discussion on this topic see: Odhnoff, 1965.


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University College London
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Corruption Russia




Title: Do public sector wages affect corruption?