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Public Procurement and Rent-Seeking: The Case of Paraguay

March 2011
World Development 77

DOI:10.1016/j.worlddev.2015.09.001

Authors:

Emmanuelle Auriol

Toulouse School of Economics

Thomas Flochel

World Bank

Stephane Straub

Toulouse 1 Capitole University

A model of entrepreneurial choices in an economy with a corrupt public procurement sector is built, providing predictions along two main dimensions. First, corruption is more frequent in sectors where public institutions are large buyers. Second, firms favoured with corrupt contracts enjoy extra returns, so that procurement related activities attract the best entrepreneurs. A large scale microeconomic database, including all public procurement operations over a 4 year period in Paraguay, amounting annually to approximately 6% of the country's GDP, is then used to corroborate these predictions.

. Exceptional purchase determinants -sub periods

…

. Exceptional purchase -differences-in-differences

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Public Procurement and Rent-Seeking: The Case of Paraguay

EMMANUELLE AURIOL

, STE

´PHANE STRAUB

and THOMAS FLOCHEL

b,*

Toulouse School of Economics (ARQADE, IDEI, and IAST), France

World Bank, USA

Summary. —A model of entrepreneurial choices in an economy with a corrupt public procurement sector is built, providing predictions

along two dimensions. First, corrupt public institutions operate by oﬀering contracts without competition and more corrupt entities

channel larger share of their budget in this way. Second, these ﬁrms enjoy extra returns, so that procurement related activities attract

the best entrepreneurs. A large-scale microeconomic database, including all public procurement operations over a 4-year period in

Paraguay, amounting annually to approximately 6% of the country’s GDP, is then used to corroborate these predictions.

Key words — procurement, corruption, rent-seeking, development

1. INTRODUCTION

Public procurement of goods and services is one of the main

areas at risk of corruption in developing countries where reg-

ulations and legal enforcement are weak. On top of the static

cost of corruption and fund embezzlement, systematic depar-

tures from competition in the attribution of public markets

are likely to have a devastating impact on economic agents’

incentives and as a result on these countries’ productive

structure. This paper presents the ﬁrst large-scale micro-level

evidence on the channels of rent-seeking and its impact on eco-

nomic development, using a unique database of nearly 50,000

public procurement operations in Paraguay, covering the per-

iod 2004–07. In a nutshell, we show that in Paraguay corrupt

behavior in the allocation of public contracts is a key channel

for rent-seeking. This large-scale network of favoritism, some-

times coined ‘‘la patria contratista”,

has deeply damaging

economic consequences: public institutions buy goods and

services at inﬂated prices, and the set of incentives facing

potential entrepreneurs is biased towards unproductive

activities.

To guide the analysis, we model the choice of formal entre-

preneurs with idiosyncratic cost levels, between serving private

consumers competitively, or joining a rent-seeking sector,

where they sell to public institutions. In this rent sector, con-

tracts are attributed by corrupt oﬃcials, who distort allocation

rules in exchange for bribes. Firms willing to do business with

the Government must therefore be proﬁtable enough to cover

their production costs as well as the bribes. We derive from the

model two main sets of predictions that are sustained by the

data, revealing the following story.

First, we establish that in Paraguay the main channel for

corruption in procurement is the systematic use of an ‘‘excep-

tional”purchase mechanism, which bypasses legally required

minimum standards of transparency and competition and is

used much more frequently than what should be expected

from international best practice. Using the whole panel dimen-

sion of the data, we show that this type of corruption is used

more by institutions–ﬁrms pairs that trade repeatedly and in

large volumes. Moreover, we exploit a natural experiment,

linked to an exogenous change in public monitoring following

the widely publicized release midway through our period of

study of an NGO report ﬂagging up exception as a key

channel for corruption, and show that its use decreased

signiﬁcantly for these pairs boasting frequent interactions.

Finally, we also provide evidence that this channel dominates

other more ‘‘traditional”ways to rig procurement contracts,

such as the breaking down of lots in amounts that escape

the obligation for open tenders.

Second, this implies that ﬁrms making more business with

the State, those in the so-called rent sectors, enjoy above nor-

mal rates of return and are the most eﬃcient ones. We provide

evidence of these two aspects, by showing that ﬁrms selling

more to the public sector, as well as those selling more through

the exception channel, have higher proﬁt margins, despite the

fact that they trade mostly in standard goods and should face

competition for the market.

As a result, public intervention in markets distort ﬁrms’

incentives by inducing additional entry in activities with an

important procurement component. To the extent that this

self-selection process pushes some of the best potential entre-

preneurs towards rent sectors, it generates a misallocation of

talents across the economy. Indeed, we document this strong

selection bias by exploiting an original econometric strategy

using ﬁrms’ names.

The paper concludes that in the case of Paraguay, the release

of the 2006 TI report and the subsequent change in exposition

to public scrutiny had an important positive impact on the

overall eﬃciency of the public procurement process. As it

made obvious the involvement of the civil society in monitor-

ing the use of public funds, and spurred an increase in the

interest of the media, it generated a change in the behavior

of the public sector with respect to the use of exceptional

procedures, especially so where the use of exception was

motivated by corrupt deals.

The rest of the paper is structured as follows. Section 2

reviews the main strands of related literature and spells out

*We are grateful to Marı

´a del Pilar Callizo and Oscar Gavila

´n from

Transparencia Paraguay for making the procurement data available and

for their support during the stay of the third author in Paraguay. We

thank the editor, three referees, and many seminar participants at

Berkeley, CERDI, Edinburgh, Guanajuato, Namur, Oxford, Paris,

Rome, Stockholm, Toulouse, the World Bank and Yale for useful

comments. Financial support from grant RENTSEP ANR-09-BLAN-

0325 is gratefully acknowledged. Final revision accepted: September 5,

2015.

World Development Vol. 77, pp. 395–407, 2016

www.elsevier.com/locate/worlddev http://dx.doi.org/10.1016/j.worlddev.2015.09.001

395

the contributions of the paper. Section 3describes the Para-

guayan institutional environment and reviews procurement

practices over our period of study. Section 4develops the

model and derives empirical predictions. Section 5presents

the data. Sections 6 and 7 present the results related to the

two main sets of theoretical predictions, and Section 8con-

cludes.

2. LITERATURE REVIEW

The idea that rent-seeking behavior has important social

and economic costs is a relatively long-standing one in the eco-

nomic and political science literature. Early contributions such

as Tullock (1967), Buchanan (1980), Krueger (1974) and

Bhagwati (1982), were concerned, mostly in a theoretical

framework, with the diﬀerent types of costs associated with

the transfer of rents and the waste generated by agents engag-

ing time and resources in competing for rents, for example

through political lobbying or corruption.

More recently, some papers have provided explanations for

ways in which rent-seeking entails dynamic costs. Baumol

(1990) and Murphy, Shleifer, and Vishny (1991) focus for

example on the resulting dysfunctional allocation of talents.

In this approach, potential investments in physical or human

capital are directed to rent-abundant sectors (such as those

stemming from political favors, corruption or exploitation of

natural resources), while investments in innovative activities,

which have greater growth potential, become relatively less

attractive and are discouraged. As supporting empirical evi-

dence, Murphy et al. (1991) present cross-country growth

regressions augmented with country-level proportions of engi-

neering and law students, where the former are said to corre-

spond to investments in productive activities while the latter

are considered rent-seekers. Baumol’s evidence, on the other

hand, is based on historical accounts from Rome, Ancient

China, and the Middle Ages.

To date, there is still limited micro-evidence on the actual

channels and consequences of rent-seeking in developing econ-

omies. Following Fisman’s (2001) seminal contribution, some

papers have stressed the performance premium of connected

ﬁrms (Hellman, Jones, & Kaufmann, 2003; Fries, Lysenko,

& Polanec, 2003; Slinko, Zhuravskaya, & Yakovlev, 2005).

Other contributions have documented the importance of polit-

ical connections in securing access to key economic inputs,

such as credit (Khwaja & Mian, 2005; Li, Meng, Wang, &

Zhou, 2008), tax advantages or foreign exchange (Hsieh,

Miguel, Ortega, & Rodriguez, 2011), or favorable regulations

(Agrawal & Knoeber, 2001). At a more general level, the large

literature on corruption that developed since the 1990s is also

relevant here, and especially the strand of more recent papers

using microeconomic evidence to directly measure corruption

and its eﬀects on outcomes.

A few contributions have dealt speciﬁcally with public pro-

curement. Hyytinen, Lundberg, and Toivanen (2007), who

study the eﬀects of politics on municipal cleaning contracts

in Sweden, show that the lowest bidder does not win 58% of

the time and that the choice of the winner is subject to political

considerations; Goldman, Rocholl, and So (2013) show that

US companies connected, through the composition of their

boards, to the winning party in both legislative and presiden-

tial elections (in 1994 and 2000) are signiﬁcantly more likely to

have experienced an increase in procurement contracts. Refer-

ences dealing explicitly with corruption include Di Tella and

Schargrodsky (2003), who document the impact of a crack-

down on corruption in Argentinean hospitals, and Bandiera,

Prat, and Valletti (2009), who disentangle the eﬀect of passive

(ineﬃciency) versus active waste (corruption) in Italy, ﬁnding

that the former accounts for about four times the eﬀect of

the latter, and Mironov and Zhuravskaya (2012), who analyze

the link between corrupt procurement and campaign ﬁnancing

in Russia. Relatedly, Davis (2004) and Deiniger and Mpuga

(2004) analyze the impact of corruption on public service

delivery in South Africa and Uganda respectively.

With respect to this literature, our paper provides two main

contributions. First, we have data not only on the expenses

realized by public institutions, but also on the ﬁrms that are

on the selling side. This enables us to capture the eﬀect of

large-scale corrupt practices on the proﬁtability of ﬁrms and

hence on the industrial structure of the economy.

We provide

evidence of the distortive eﬀects of rent-seeking in terms of

economic eﬃciency, by showing that it implies an ineﬃcient

specialization of the more able entrepreneurs in imports and

procurement activities. Second, we document one of the most

prevalent channels of corruption in procurement activity,

namely the use of purchase mechanisms circumventing stan-

dard competitive rules, and uncover the economic characteris-

tics of the institutions and sectors more prone to it.

3. RENT-SEEKING AND CORRUPTION IN

PARAGUAYAN PROCUREMENT

Paraguay is considered to be one of the most corrupt coun-

tries in the world.

Our period of study is part of a non-

interrupted 61-year spell, including the 1954–89 Stroessner

dictatorship, in which the Colorado party governed the coun-

try. At the heart of the system was the distribution of public

employment and contracts to its supporters, and the exclusion

of its opposition.

An important channel for corruption,

which we focus on here, was the allocation of public contracts

to ﬁrms that in most cases were created with the sole purpose

of supplying the state, often by selling a wide variety of

imported goods. As a result of the ample anecdotal evidence

of corruption in public procurement, and under pressure from

international organizations, a law regulating public procure-

ment practices (law 2051/03) was enacted in 2003 by the gov-

ernment of the newly elected president Nicanor Duarte

Frutos, with the announced intention of promoting transpar-

ency and eﬃciency in public purchases. The most signiﬁcant of

its provisions were the creation of a public procurement

watchdog (the National Directorate of Public Procurement,

or DNCP), the design of a menu of purchase mechanisms to

regulate procurement procedures, and the compulsion to make

all information (calls, providers, award, etc.) public. This last

proviso was accompanied by the creation of the DNCP web

site where this information is available, but in practice access

is often intermittent and the interface is impractical.

There are strong indications however that improvements in

the regulatory framework did not translate quickly into clea-

ner procurement practices, partly because many oﬃcials did

not comply with the new law and the wrongdoings continued.

The main mechanism through which ﬁrms were favored is the

use of the exceptional purchase mechanism, by which speciﬁc

regulations, such as the obligation to organize public tenders

above certain amounts, were disregarded (see details in Sec-

tion 5below). In 2006, Transparencia Paraguay (TP), the

local chapter of Transparency International, published an

extensive report sponsored by the Inter-American Develop-

ment Bank (IDB) focusing on the excessive use of exceptional

procedures, which was clearly identiﬁed as one of the main

irregularities in the procurement process.

The Electricity

396 WORLD DEVELOPMENT

State-owned enterprise ANDE has for instance been pointed

out for buying large numbers of electric transformers in this

way over the years, despite the fact that these are routinely

required by the ﬁrm for network repairs. Firm oﬃcials recog-

nize that this practice usually generates excess pricing of

between 17% and 27%.

Because the report was given ample coverage in the local

media and through public presentations, and its recommenda-

tions were subsequently relayed by the IDB–World Bank Par-

aguayan public procurement evaluation panel, the oﬃcials in

charge of procurement in public institutions and ﬁrms became

more cautious. Indeed, in 2004 and 2005 purchases made

through the ‘‘exceptional”procedure amounted to nearly

24% of the total procurement spending. In the period

2006–07 the share of purchases made through the ‘‘excep-

tional”procedure decreased to 13%. We exploit this ‘‘natural

experiment”, by showing that the speciﬁc pairs of institutions

and ﬁrms that we identify as irregularly using exception in the

ﬁrst subperiod, subsequently experienced the largest reduction

in its use.

The next section builds a model of corrupt procurement,

from which we derive predictions that we exploit to conduct

an empirical analysis of corruption in public purchases in

Paraguay.

4. THE MODEL

The model focuses on the formal sector of the economy as

formal ﬁrms are the only ones allowed to compete for public

markets. The production functions involve constant returns

to scale technologies.

The cost function of a producer oper-

ating in the formal sector is CðqÞ¼cq, where by assumption

Assumption A1. cis independently and uniformly distributed

in ½0;c.

Entrepreneurs in the formal sector have the choice between

procuring commodities for the public sector, where, as corrup-

tion prevails, they make rents, or doing business in the private

sector where they serve consumers competitively. As a bench-

mark, we ﬁrst brieﬂy discuss the corruption-free equilibrium.

In the absence of rent-seeking opportunities, entrepreneurs

serve market demand competitively and make no rents. Com-

petitive pressure helps to select the best available technology

so that in equilibrium the price equates the lowest marginal

cost, p¼0, and quantities traded in the private sector are

DðpÞ. Welfare is maximized.

Rent-Seeking. We now turn to the case, denoted by the

superscript r, where corruption prevails in public purchase.

While in practice corruption and bribes are not observed,

the model based on assuming the existence of corruption will

generate a number of testable predictions discussed below.

Optimal procurement rules specify that for large purchase

above given thresholds it is mandatory to organize a compet-

itive tender (see Auriol, 2006), and to advertise the calls to

encourage submissions by ﬁrms. In practice it is not always

possible to organize a competitive tender, for instance because

the commodity is patented, or there is an emergency. To deal

with these speciﬁcs cases, public procurement rules include an

‘‘exceptional purchase”procedure. When they rely on this type

of procedure, public purchasers are able to bypass the compe-

tition phase. This is the easiest way to favor a ﬁrm in exchange

of a bribe. Auriol (2006) shows that for large purchases a cor-

rupted procurement oﬃcial favors limited tendering proce-

dures (i.e., exceptional purchase), thereby maximizing the

price of the purchase and his bribe.

We thus expect corrupt

Paraguayan public institutions to rely on the exceptional pur-

chase mechanism to collect bribes over large purchases.

Firms selection in the rent sector. The public purchaser

chooses how many ﬁrms should be included in the rent sector

and creates a lot for each of them out of his/her total budget.

A ﬁrm invited to procure one of these lots through exceptional

purchase is in a monopoly position. It can ask for the highest

possible unit price c. In the rent sector a contract of size q>0

hence costs cq. The government oﬃcials choose b2½0;1, the

share of cq they take as a bribe in exchange for giving this

market to a ﬁrm without competition.

We deduce that, in

the rent sector, the proﬁt of a ﬁrm with cost c2½0;cand

lot size q>0 is:

PðcÞ¼qðccÞbcq ð1Þ

To access the rent sector the ﬁrm must pay bcq. Since bcq is

independent of the cost of the ﬁrm, the bribe is equivalent to

a ﬁxed cost which screens out the less eﬃcient ﬁrms. Let

crðbÞ2½0;cdenotes the ﬁrm that is just indiﬀerent between

the rent and the private sector: PðcrðbÞÞ ¼ 0. Since the bribe

is a fraction of the market value (i.e., it is linear in cq), the

value crðbÞis independent of q. It is straightforward to check

that

crðbÞ¼cð1bÞ:ð2Þ

We deduce that if c<crðbÞthen PðcÞ¼qc

rðbÞc½>0. In

the public sector rents are made and diﬀerent types of ﬁrms

coexist because corruption creates artiﬁcial barriers to entry.

By contrast entrepreneurs with costs higher than crðbÞwould

make a loss, and so prefer to serve private demand. It is intu-

itive that the share of ﬁrms in the rent sector, crðbÞ

c¼1b<1,

decreases with b. The more greedy government representatives

are, the more proﬁtable ﬁrms need to be to do business with

them: they need to be able to cover their cost plus the bribes

and still make non-negative proﬁt.

Optimal bribe rate. By choosing b2½0;1the public pur-

chaser chooses how many ﬁrms enter the rent sector. Then

she attributes to each ﬁrm with a marginal cost lower than

crðbÞa lot. In our database the lots qij >0 vary depending

on the identity of the purchaser (institution j) and of the seller

(ﬁrm i). As shown by Eqn. (2) our results are independent of

the exact size of the lots and on their distribution among the

ﬁrms in the rent sector, so we leave them unspeciﬁed. The only

constraint is that the lots are positive in value and that their

sum is equal to the available budget. To compute the optimal

bribe rate, public oﬃcials internalize the risk of corruption

being detected and punished.

We assume that the greedier

the public purchaser (i.e., the higher bthe bribe rate) the

higher the risk of detection.

That is, the probability of detec-

tion is GðbÞ2½0;1, where GðbÞis a distribution function and

gðbÞ¼G0ðbÞ>0 is the associated density function deﬁned

over ½0;1satisfying the monotone hazard rate property

Assumption A2. 1GðbÞ

gðbÞis decreasing in b.

Consistently with empirical evidence we focus on weak pun-

ishment: in case of detection the bribe is lost to the oﬃcials.

For a purchase of total size Q, the net expected rent of the

public purchaser then writes B¼bcQ 1GðbÞðÞ. To avoid

being excluded from the lucrative bribes business, the public

purchaser needs to split the budget among enough ﬁrms

(i.e., to choose a low enough b). This captures in a simple

way the fact that Paraguay at the time of the study was a

PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 397

patronage economy. Indeed, the Colorado party was able to

maintain itself in power for 61 years by sharing among its fol-

lowers the windfall from power through corrupted deals.

We deduce the next result.

Proposition 1. The bribe rate, br2ð0;1Þ, is solution to:

1GðbÞ

gðbÞ¼bð3Þ

Entrepreneurs choose the rent sector if and only if

c<cð1brÞð4Þ

Under Assumption A2 it is easy to check that brsolution of

(3) exists and is unique.

Proposition 1 indicates that the most productive entrepre-

neurs choose the rent sector where there is no competition

and commodities are overpriced, so that they make rent

(i.e., PðcÞ¼qc

rðbÞc½>0 for all c<ð1brÞc). The model

captures the essence of the redistribution mechanism among

the Paraguayan elite: only the ﬁrms with the lowest cost

are included in the corrupted deals. Firms with high cost

(i.e., those with little physical and social capital, run by

poorly educated and connected managers, etc.) are left to

serve private demand. We deduce that entrepreneurs who

choose to do business with the government are the most

eﬃcient ones and they make rents. Compared to a

corruption-free economy, prices are higher so that the quan-

tities consumed in equilibrium are smaller, leading to lower

aggregate production.

In practice procurement activities are decentralized at the

institution level (ministries, state enterprises, etc.), so for the

empirical analysis bshould be thought of as institution-

speciﬁc. Corruption detection varies from one institution

to another. They diﬀer in their level of exposure to public

scrutiny, depending for example on how many people are

harmed by corruption or on how politically sensitive their

activities are. They also diﬀer in their capacity to realize

and hide corrupt acts. A simple way to formalize this in

the context of the model is in terms of hazard rate domi-

nance, which implies stochastic dominance.

We deduce

easily the next result.

Proposition 2. Let Gð:Þand Kð:Þbe two distributions of

probability of corruption detection such that gðbÞ

1GðbÞ6

kðbÞ

1KðbÞ8b2½0;1. Let br

Gand br

Kbe deﬁned in Eq. (3)with

distributions Gð:Þand Kð:Þrespectively. Then br

GPbr

Institutions characterized by a lower probability of

detection (i.e., lower hazard rate) will be less cautious to hide

corruption and will ask for more bribes. It implies that the

average lot size, q¼Q

1b, which increases with b, will be larger

for those institutions.

It is intuitive that when the public

oﬃcials are more greedy there are less ﬁrms that are able to

survive in the rent sector and that their lots size is then larger.

At the institution level, we hence expect a correlation between

the frequency of exceptional purchases, which is our marker

for corruption, and the average market shares attributed to

providers.

Summary of empirical predictions. Our theoretical results

lead to two main sets of predictions that we take to the data

in the following order, using several complementary empirical

strategies.

First, according to Proposition 2, institutions character-

ized by a lower probability of detection rely more heavily

on exceptional purchase and have larger lots size attributed

to their providers. In Section 6, we test this prediction in

two steps. In the ﬁrst one, we discuss in details why in

Paraguay the use of exceptional purchase mechanisms

can be considered a marker for corruption. We then

establish that more corrupt institutions do indeed attribute

larger lots to their providers through the exceptional

purchase mechanism.

Second, following Proposition 1, entrepreneurs who

enter the procurement sector are the most eﬃcient ones

and they are making positive rents. We test this prediction

in Section 7.

5. THE DATA

Procurement data.

The main data set tracks all the pro-

curement transactions made over the period 2004–07 between

73 public entities (representing over 90% of total Paraguayan

public spending and employment) and 5,517 diﬀerent private

suppliers.

These 47,615 public purchases include all types

of goods and services, from stationary to machinery, oil pur-

chases, food, services, etc. There are good reasons to believe

that no public procurement operations escape registration

as, under the new system, contracts need to be registered

and executed before the corresponding funds are released.

Total public spending over the whole period amounts to Gs.

12,400 bn. (approx. US$ 2,235 m),

which represents

between 5.5% and 6.9% of Paraguay’s yearly GDP.

The distribution of contract values has a fat left-hand tail

with 84% of purchases costing less than 2000 minimum daily

wage (mdw), while 5.5% of contracts costing over 10,000

mdw make up 86% of the total spending. The sample mean

is approximately US$ 47,000, equivalent to 36 times the

national per capita GDP at the time.

Each observation in the procurement data set contains the

name and type of the public entity, the name and legal regis-

tration number (RUC) of the supplying ﬁrm and its owner,

and information on the purchase including the nature of the

good or service categorized in 25 diﬀerent groups, the total

cost in local currency, and the purchase mechanism used.

Purchase mechanisms are a key provision of the 2003 public

procurement law, regulating the procedures to be followed in

allocating contracts depending on their total value. There are

ﬁve legal purchase mechanisms with gradually increasing con-

straints on the minimum number of oﬀers, the mode and

length of publication of the call for oﬀers, and the attribution

procedure.

Finally, these guidelines can be disregarded in cases of emer-

gency, such as natural disasters or health epidemics, for the

purchase of patented and copyrighted goods, or for purchases

requiring defense secrecy. In those extraordinary circum-

stances, public oﬃcials can skip all formal purchase require-

ments through the so-called exceptional purchase

mechanism. In our sample, exceptional purchases are quite

common for certain categories of goods or services, such as

rentals, advertisement, consultancy and transport.

Tax ranking data. We use annual rankings of top taxpayers

published on the Ministry of Finance’s web site. Firms’ ranks

are determined by their total payments on all taxes.

Once

public ﬁrms are excluded, we have information for 748 ﬁrms

in 2004, 459 ﬁrms in 2005, 482 ﬁrms in 2006, and 478 ﬁrms

in 2007.

398 WORLD DEVELOPMENT

Import–export data. We also include annual rankings from

the Customs’ SOFIA oﬃcial data base. These include the full

universe of importers from 2004 to 2007, including the total

free on board (FOB) value imported, and of exporters for

the same period, including the cost, insurance, freight (CIF)

value exported.

Institution-level corruption indices. We introduce institution-

level corruption indices for a subset of 13 institutions in our

sample. In total, this covers 15,640 of our initial observations,

equivalent to 32.8% of the total. These indices were developed

by the NGO Transparencia Paraguay during 2004–08.

6. CORRUPTION AND THE STRUCTURE OF

PURCHASES

It is useful to discuss the claim that the use of exceptional

purchases is the main channel for corruption in the context

we study. Three aspects are relevant here. First of all, as men-

tioned in Section 3, there is ample anecdotal evidence support-

ing this claim, in particular the report by Transparencia

Paraguay (2005), which has been widely publicized. Second,

the use of such procedure in the Paraguayan context vastly

exceeds comparable ﬁgures from around the world. For

instance, in a sample of Brazilian health procurement con-

tracts between 2004 and 2009, exceptions amount to approxi-

mately 9%.

Similarly, from 2006 to 2010, only 7% of EU

procedures were ‘‘negotiated without publication”, corre-

sponding to 5% of the value share of total procurement con-

tracts above the EU threshold for mandatory call for

tender.

By means of comparison, the equivalent ﬁgure in

Paraguay in the two-year period before the publication of

Transparencia Paraguay (2006), looking at contracts above

the 2,000-mdw threshold for mandatory call for tender, is

20.4% of all awards. In terms of share of total contract value,

it climbs to 23.8%.

Finally, it is worth noting that estimations not shown here

to save space provide evidence that none of our results go

through when using as a marker of corruption an other com-

monly mentioned channel for corruption in procurement,

namely the practice of breaking down contracts in smaller lots

so that they can be attributed without competition. This is true

using as dependent variable an indicator of whether the con-

tract lies in a 10% or 20% value band just below the threshold

that implies mandatory open tender. This shows that in the

context of generalized corruption prevailing in Paraguay, pub-

lic purchasers were careless and used the simplest procedure

available to favor ﬁrms.

Going to the estimations, note that our unit of observation

is the individual purchase. Corruption being in most cases not

observed, our identiﬁcation strategy, following the model,

relies on documenting the link between the frequency of

non-competitive procedures (i.e., exceptions), the intensity of

ﬁrm–institution relationships (i.e., the lot size in the model),

as well as institution-level detection proneness (i.e., the detec-

tion functions). Each of the 47,615 purchases available corre-

sponds to a pair composed of a ﬁrm iand an institution j. Our

sample of 73 institutions and 5,517 ﬁrms generates a total of

13,693 diﬀerent ‘‘active”pairs, with an average number of con-

tracts equal to 3.5 (std. dev. 10.5), a minimum of 1 (for 7,215

pairs) and a maximum of 460.

We estimate the following basic model:

excijkt ¼hjþhkþhtþXijtb1þeijkt ;ð5Þ

where exc is a binary variable equal to 1 if the contract over

good kprocured from ﬁrm iby institution jin year tis made

through the exception, and h0sare institution (j), good (k), and

year (t) ﬁxed eﬀects. We use a linear probability model to esti-

mate the model above.

The ﬁxed eﬀects allows us to capture any systematic deter-

minants of exceptional purchase that would correspond to

characteristics of the goods (patented or monopolistic goods,

exclusive dealing) and the institutions (speciﬁcally dedicated

to attend emergencies, involved in defense deals, etc., possibly

with changes over time), as well as speciﬁc time ﬂuctuations or

trend in the use of exceptions. Once these ﬁxed eﬀects are

introduced, we expect no additional features to be signiﬁcant

if procurement rules are applied correctly.

Our explanatory variables of interest Xijt are ﬁrm–

institution-level ones: the total value of each pair’s transac-

tions and the proportion of an institution’s transactions done

with each particular provider, year by year. These are two

measures of the lot size described in the model. Our model sig-

nals as a symptom of corruption the fact that institutions,

which do more exception for that purpose do that through

the attribution of larger lots to their providers (i.e., a more

corrupt public purchaser asks for larger bribes which reduces

the number of ﬁrms able to pay them, and increases their aver-

age lot size see Proposition 2).

Table 1 contains the results from (5). In column 1, which

report the estimation with institution, goods and year ﬁxed

eﬀects, the larger the share of an institution’s transactions

done with each particular provider, the higher the probability

that the contract is made through exception, an eﬀect signiﬁ-

cant at the 5% level. This is robust to adding both

institution-year and goods-year ﬁxed eﬀects in column 2.

The marginal eﬀect implies that an institution increasing the

share of its total procurement volume allocated to a particular

ﬁrm from 0.9% to 3.8% of its portfolio (that is by one standard

deviation above the sample mean), would increase the share of

its contracts with that particular ﬁrm made through the excep-

tion by 36%.

In Column 3, where we add a full set of ﬁrm

ﬁxed-eﬀect, the signiﬁcance is lost, which is not very surprising

considering the number of additional parameters (over 5,000).

Proposition 2 suggests that institutions more exposed to

public scrutiny use less exceptional purchase. We use the

institution-level corruption indices described in the data sec-

tion to proxy for this exposure. We measure corruption with

a synthetic index equal to the arithmetic mean of three original

indices, namely the evaluations based on the Comptroller

General’s report, the number of administrative indictments

in any given institution, and the number of newspaper articles

mentioning corruption in each institution.

We introduce the following speciﬁcation, where we expect b2

to be positive if the corruption story is relevant

excijkt ¼hjþhkþhtþhjt þXijtb1þXijt Inst Corr jt



b2þeijk:

ð6Þ

The results are in columns 4–6 of Table 1. In column 4, con-

tract value becomes negative, while its interaction with corrup-

tion is positive and signiﬁcant at the 1% level. This conﬁrms

that the link between frequent interactions and exceptional

purchases is mediated by corruption. This eﬀect remains signif-

icant with institution- and goods-speciﬁc time trends in column

5 and, more strikingly, with ﬁrm ﬁxed eﬀects, in column 6.

This ﬁrst set of result support the corruption hypothesis and

gives us more conﬁdence that corruption is the relevant expla-

nation. Of course, despite being more satisfactory than usual

subjective indicators, we cannot completely rule out endogene-

ity of the corruption measure used here, and ﬁnding appropri-

ate instruments appears diﬃcult.

PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 399

Alternative interpretations for the results that frequent pair

interactions lead to more contracts through the exception

include ﬁrst a ‘‘reputation”eﬀect. In circumstances where pub-

lic institutions need to use exceptional mechanisms, for exam-

ple because of some social emergency, they may turn to ﬁrms

they have had frequent interactions with, because they know

these are more reliable. Another explanation involves simple

ineﬃciency or passive waste, as Bandiera et al. (2009) docu-

ment in the case of public procurement in Italy. Here, the

argument is that procurement oﬃcials simply award contracts

to ﬁrms they already know, because they do not internalize the

new rules or because they are lazy and it is the solution that

requires less eﬀort.

To sort out the diﬀerent explanations, our strategy is to

exploit the shock created by the publication of the Transpar-

ency Paraguay report at the beginning of 2006, which

attracted attention to what was considered the excessive use

of exception in public contracting. This prompted debates

and comments in the media and the political arena, as well

as incentives for investigative journalism in the country to

inquire speciﬁcally on procurement done through the excep-

tional procedure. Our hypothesis is that if exception is indeed

a mean to make corrupt deals, the institution–ﬁrm pairs that

were using exception frequently should display greater reduc-

tions in its use as a result of this shock. In other words, we

hypothesize that where the use of exception was motivated

by corrupt deals, the higher risk of being discovered and sanc-

tioned brought about by increased public scrutiny should have

generated a stronger decrease in its use than where it was moti-

vated by justiﬁable reasons.

The resulting diﬀerence-in-diﬀerences strategy thus should

display a positive coeﬃcient based on this diﬀerential eﬀect,

even in the case where the report implied an overall reduction

in exceptional purchase. From a theory point of view, this cor-

responds to the monitoring shock shifting the detection func-

tion for a subset of ﬁrm–institution pairs, as described in

Proposition 2 above. Alternatively, if the explanation for high

levels of exception is simply ineﬃciency, or if the decrease

results from a learning process, we should observe a reduction

in its use across the board, and the diﬀ-in-diﬀ estimator should

not be signiﬁcant.

Table 2, in which we run the basic estimations of Table 1,

columns 1–3, over the separate subperiods 2004–05 and

2006–07, provides a ﬁrst illustration. Over the period 2004–

05, the variables proxying for frequent/intense ﬁrm–institution

relationship, i.e., the total value of pair’s transactions and the

share of institutions’ transactions done with each particular

provider, are signiﬁcant ﬁve times out of six, including in spec-

iﬁcations with ﬁrm ﬁxed eﬀects, in column 3. On the contrary,

they are almost never signiﬁcant in the period 2006–07, and

even become negative with ﬁrm ﬁxed eﬀects in column 6.

In the ﬁrst sub-period, a one standard deviation in value of

pair’s transactions reduces the average use of exception by

between 3% and 4%, while the same eﬀect is more than an

order of magnitude smaller in the second sub-period. The

magnitude of the eﬀect is similarly smaller when looking at

shares.

In Table 3, we present the results from a formal diﬀerences-

in-diﬀerences based on these insights. We estimate the follow-

ing regression, where b3is the diﬀ-in-diﬀ estimator:

excijk ¼b0þb1D0607 þb2DTþb3ðD0607 DTÞþeijk >0;ð7Þ

For the sake of robustness, we consider three alternative ways

to construct our treatment group of institution–ﬁrm pairs:

based on high-volume, high share of institutions’ budget,

and high use of exception in the 2004–05 period (see Online

Appendix for details).

The results in Table 3 are striking. In column 1, the treatment

group includes institution–ﬁrm pairs with total transactions

value above the median in the ﬁrst period; the diﬀ-in-diﬀ

estimator is negative and signiﬁcant at the 1% value, and indi-

cates that the treatment group reduces its average contracting

by exception by close to 4%. The result is more telling when

translated in terms of amounts: for the treatment group, the

value of transactions made by exception goes from representing

23.2% of the total in the ﬁrst period to only 12.2% in the second

period. This 9 percentage points (pp) reduction should be com-

pared with that of the control group which is only 4.3 pp (from

16% to 11.7% of the total).

A similarly strong result emerges in column 2 when using

instead the share of institutions’ budget as our treatment crite-

ria. There is a decrease between the two periods, signiﬁcant at

the 1% level. The size of the eﬀect is similar, as the treatment

group experiences a reduction in the value share of exception

of 10.2 pp, while the corresponding control group reduction is

of 3.4 pp.

Table 1. Exceptional purchase determinants and institution-level corruption

(1) (2) (3) (4) (5) (6)

Total value of pair ij 0.002 0.002 0.003 0.123 0.001 0.030

contracts (0.002) (0.002) (0.002) (0.056)

(0.065) (0.030)

Share of institution j0.335 0.360 0.032 1.349 0.690 0.099

contracts with ﬁrm i(0.137)

(0.154)

(0.106) (0.621)

(0.656) (0.409)

Total value of pair ij 0.049 0.024 0.026

contracts x corruption (0.012)

***

(0.011)

Share of institution j0.272 0.145 0.059

contracts with ﬁrm icorruption (0.155) (0.170) (0.067)

Instit. F.E. Yes Yes Yes Yes Yes Yes

Goods F.E. Yes Yes Yes Yes Yes Yes

Years F.E. Yes Yes Yes Yes Yes Yes

Instit. years F.E. Yes Yes Yes Yes

Goods years F.E. Yes Yes Yes Yes

Firms F.E. Yes Yes

Observations 47,615 47,615 47,615 15,489 15,489 15,489

R-Squared 0.09 0.12 0.53 0.13 0.17 0.60

Note: In columns 1–6, the dependent variable is an dummy equal to 1 if a contract was made by exception, and 0 otherwise. Corruption is an institution-

level corruption index. Robust standard errors in parentheses, clustered at the institution level. Stars indicate signiﬁcance at the 10% (*), 5% (**), and 1%

(***) respectively.

400 WORLD DEVELOPMENT

In column 3, we experiment with yet another deﬁnition of

the treatment group, based on the use of exception in the base

period. The result again strongly support our hypothesis: the

diﬀ-in-diﬀ estimator is negative and signiﬁcant at the 1% level,

with a probability reduction of 14%. In terms of amounts, the

treatment group value share of exception diminishes from

50.9% to 7.3%, while for the control group it experiences an

increase from 1.4% to 19.9%.

Columns 4 presents the case where the treatment is deﬁned

on the basis of the share of exception in a pair’s transaction

being above the average. Again, the diﬀ-in-diﬀ coeﬃcient is

negative and signiﬁcant at the 1% level, indicating a probabil-

ity decrease of 21%. The changes in terms of amounts are very

close to those of column 3. Finally, column 5 provides an addi-

tional robustness check, by restricting the base sample to pairs

that have strictly positive exception use in the period 2004–05,

with again very similar results: a probability decrease of 15%,

signiﬁcant at the 1% level.

Finally, in the last line of Table 3, we also report the results

from similar speciﬁcations with a continuous version of the

treatment variables. The complete set of results are on line

with those of the discrete version.

Additional technical details and robustness tests, including

the way treatment groups are constructed, and a comparison

of pre-treatment trends between treatment and control groups,

supporting the idea that the report’s publication can be viewed

as a natural experiment, are also provided in Online Appen-

dix.

In the next section, we turn to show how the corrupt prac-

tices documented above distort the proﬁtability of ﬁrms.

Table 2. Exceptional purchase determinants – sub periods

(1) (2) (3) (4) (5) (6)

2004–05 2004–05 2004–05 2006–07 2006–07 2006–07

Total value of pair ij 0.037 0.035 0.032 0.001 0.001 0.002

contracts (0.019)

(0.017)

(0.019)

(0.001) (0.001) (0.002)

Share of institution j0.339 0.297 0.085 0.209 0.259 0.097

contracts with ﬁrm i(0.178)

(0.173)

(0.146) (0.129) (0.139)

(0.122)

Instit. F.E. Yes Yes Yes Yes Yes Yes

Goods F.E. Yes Yes Yes Yes Yes Yes

Years F.E. Yes Yes Yes Yes Yes Yes

Instit. years F.E. Yes Yes Yes Yes

Goods years F.E. Yes Yes Yes Yes

Firms F.E. Yes Yes

Observations 22,179 22,179 22,179 25,436 25,436 25,436

R-Squared 0.09 0.11 0.51 0.11 0.14 0.62

Note: In columns 1–6, the dependent variable is an dummy equal to 1 if a contract was made by exception, and 0 otherwise. See Table 2 notes for variables

deﬁnitions. Robust standard errors in parentheses, clustered at the institution level. Stars indicate signiﬁcance at the 10% (*), 5% (**), and 1% (***)

respectively.

Table 3. Exceptional purchase – diﬀerences-in-diﬀerences

Pair-level treatment criteria (1) (2) (3) (4) (5)

Absolute value

of transactions

Share of transactions

in institution budget

Absolute value

of exception

Share of transactions

done by exception

Share of transactions

done by exception

(only > 0 obs.)

0607

0.012 0.003 0.000 0.023 0.086

(0.011) (0.015) (0.012) (0.015) (0.010)

***

0.022 0.034 0.216 0.384 0.332

(0.008)

(0.006)

***

(0.020)

***

(0.035)

***

(0.027)

***

0607

D

0.037 0.030 0.138 0.211 0.151

(0.012)

***

(0.011)

***

(0.017)

***

(0.017)

***

(0.042)

***

Observations 37,453 37,453 37,453 37,453 13,709

R-Squared 0.46 0.46 0.47 0.52 0.52

D

0.003 0.007 0.080 0.092

0.019

(0.018) (0.010) (0.049) (0.046) (0.057)

Continuous 0.187 0.235

0.371

***

0.342

***

0.208

***

treatment (0.365) (0.132) (0.099) (0.047) (0.050)

Note: In columns 1–6, the dependent variable is an dummy equal to 1 if a contract was made by exception, and 0 otherwise. D

06–07

is a dummy variable

taking value 1 for the period 2006–07. D

is the treatment group dummy; for each column, the line pair-level treatment criteria indicates the way D

deﬁned at the institution–ﬁrm pair level. All estimations include ﬁrms, institutions, goods, institutions * years, and goods * years ﬁxed eﬀects, as well as a

control for the amount contracted. The last two lines show the diﬀ-in-diﬀ coeﬃcients and standard errors from similar estimations on the 2004–05 sample

only, where D

is a dummy variable taking value 1 for the year 2005.

Robust standard errors in parentheses, clustered at the institution level. Stars indicate signiﬁcance at the 10% (*), 5% (**), and 1% (***) respectively.

PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 401

7. THE PROFITABILITY OF FIRMS

The model’s second set of predictions is that, as a result of the

corrupt practices unveiled above, entrepreneurs doing business

with public institutions are more proﬁtable than their counter-

parts serving private demand. Moreover, the most able entre-

preneurs are expected to self-select into the more proﬁtable

procurement activities, as only they are eﬃcient enough to

aﬀord both the production cost and the bribes to public oﬃcials.

Proﬁtability in the rent sector. We ﬁrst perform a reduced

form analysis of the eﬀect on ﬁrms’ proﬁts of a number of vari-

ables, derived from the results in the previous section. As a

proxy for the share of ‘‘favored”contracts in the ﬁrm’s port-

folio, we use the share of a ﬁrm’s contracts made through

the exception, and the weighted average level of corruption

of the institutions it deals with (where the weights are the share

of the sales to these institutions in the ﬁrm’s total sales). In

addition, we also use ﬁrms’ amount and number of contracts.

The amount of taxes paid provides a reasonable approxima-

tion for proﬁts because the tax rate on gains is ﬂat and uni-

form in each period (30% in 2004, 20% in 2005, 10% in 2006

and 2007). While the inclusion of other taxes (among which

custom duties are by far the largest component) introduces

some noise in the mapping between proﬁts and taxes paid,

we control for total imports in all estimations to minimize this

issue. The model we want to estimate is:

Git ¼aþb1Zit þb2Mit þXitb3þhtþeit ;ð8Þ

where Git denotes the net gains of ﬁrm iin year t,Zit is the var-

iable of interest (alternatively, the share of sales through the

exception, average corruption of buyers, total sales to the

state, number of contracts), Mit is the total amount imported,

Xit is a vector of control variables, and htare time ﬁxed eﬀects.

However, the income tax and other taxes are amalgamated

in the tax data, so we only observe:

Tit ¼xtGit þdiMit þmit;ð9Þ

where xt¼0:3 for 2004, xt¼0:2 for 2005, and xt¼0:1 for

2006 and 2007. In order to obtain the ﬁrms’ net gains we

therefore divide the total amount paid in taxes by the corre-

sponding tax rates.

We thus test the following speciﬁcation:

Tit=xt¼aþb1Zit þðb2þdi=xtÞMit þXitb3þhtþeit þmit

;

ð10Þ

under the assumption that Zit is uncorrelated with mit .

The distribution of proﬁts resulting from the available data

is truncated at a strictly positive point. Moreover, the set of

ﬁrms for which we have non-zero tax data is not constant over

time. This forces us to restrict the panel to the subset of strictly

positive tax observations.

As a result, we obtain an unbal-

anced panel of 2,167 observations across 4 years for 1,017 pri-

vate ﬁrms.

One worry is that unobserved ﬁrm characteristics might be

correlated both with the amount of taxes paid and with some

of the Zit variables on the right hand side.

For example, more

eﬃcient entrepreneurs might be more successful in general,

hence pay more taxes, and also win more procurement con-

tracts or be more frequently favored through exception because

of their good reputation. Another concern is related to ﬁrm

size. Indeed, bigger ﬁrms may have larger overall proﬁts and

also be in a better position to win procurement contracts or

to respond to emergency calls from public institutions. To

address such issues, we add ﬁrm-level ﬁxed eﬀects hito (10),

exploiting the panel dimension of the data to wash out any time

invariant ﬁrm-level unobserved characteristics.

The results in Table 4 support our hypotheses. Column 1

shows that ﬁrm’s proﬁts are signiﬁcantly increasing in the

share of its contracts made by exceptional purchase. The aver-

age marginal eﬀect implies that a 1% increase in the share of

contracts made by exception corresponds to Gs. 28 millions

(US$ 5,600) additional proﬁts.

In column 2, the correlation between the average level of

corruption of public buyers and ﬁrms’ proﬁtability is positive

but only nearly signiﬁcant at conventional levels, which is not

surprising given that the sample size is reduced to 261 since

corruption indices are not available for all institutions.

Finally, in columns 3 and 4, we look directly at the correla-

tion between ﬁrms’ proﬁts and their procurement activity. The

coeﬃcients of both the amounts sold and the number of

contracts are positive and signiﬁcant. In terms of marginal

Table 4. Procurement and proﬁtability of ﬁrms

(1) (2) (3) (4)

Random eﬀects Fixed eﬀects Fixed eﬀects Fixed eﬀects

Imports 0.001 0.003 0.000 0.000

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

Exports 0.000 0.024 0.001 0.001

(0.000)

(0.021) (0.000)

(0.000)

Exceptional purchase 2.834

(1.412)

Corruption index 1.205

(0.814)

Amount sold 0.293

(0.108)

***

Number of contracts 0.154

(0.062)

Time F.E. Yes Yes Yes Yes

Firms F.E. No Yes Yes Yes

Observations 476 261 2167 2167

R-Squared 0.46 0.66 0.25 0.25

Hausman chi2 0.40 0.00 0.00 0.00

Standard errors in parentheses. Stars indicate signiﬁcance at the 10% (*), 5% (**) and 1% (***) respectively.

Note: In all columns the dependent variable is ﬁrm-level gains, deﬁned as in Eqn. (10). All data adjusted for yearly price variations. In each case, we test

the appropriateness of the random versus the ﬁxed eﬀect model, using the standard Hausman test. We report only the speciﬁcation supported by the test.

402 WORLD DEVELOPMENT

eﬀects, every additional Gs. sold to the state translates into a

Gs. 0.29 increase in proﬁts, i.e., a rate of return on procure-

ment operations of nearly 29%, while a ﬁrm obtaining an addi-

tional contract increases its proﬁts by Gs. 154 millions

(approx. US$ 30,800).

These results, together with those of the previous Sec-

tion showing that ﬁrms with bigger procurement portfolios

are more likely to enter in side deals, imply that average

proﬁtability should be higher in procurement than in private

markets.

In turn, this is likely to distort ﬁrms’ incentives

and induce additional entry of potential entrepreneurs into

these sectors. Next, we provide evidence of this self-selection

process.

Misallocation of talents. An important point of the model is

that ﬁrms’ unobserved attributes (entrepreneurial or network-

ing skills, eﬃciency, etc.) should explain part of their increased

proﬁtability due to a self-selection process. Some of the best

entrepreneurs are attracted to sectors where they can beneﬁt

from the corrupt allocation of procurement contracts,

resulting in a misallocation of talents in the economy.

The following test explicitly addresses the process of

self-selection into the procurement sector, using a procedure

proposed by Wooldridge (2002, p. 631).

This entails

estimating ﬁrst a probit model to explain the fact that ﬁrms

intervene in the procurement sector or not:

Yi¼1Y

i¼h0þXih1þSih2þei>0



;ð11Þ

where Yiis a dummy variable equal to 1 if the ﬁrm sells to

public institutions at any point during the sample period, Xi

is a vector of ﬁrm-level observables, and Siis a set of instru-

ments. From (11), we derive b

/, the predicted density and b

the corresponding predicted cumulative density. We then

estimate, for each year, the following tobit model:

Git ¼max 0;aþb1Zit þXitb2þb3Yib

Uþb41Yi

ðÞ

1b

Uþeit

ð12Þ

Remember that Git denotes the net gains of ﬁrm iin year t,Zit

is either total ﬁrm’s sales to the state or its total number of

contracts, and Xit is a vector of control variables. We are inter-

ested in the statistical signiﬁcance of the two last regressors, as

an indication of self-selection, as well as in how their inclusion

will aﬀect the coeﬃcient b1.

Table 5. Self-selection into procurement and ﬁrms’ proﬁtability

(1) (2) (3) (4) (5) (6) (7) (8)

Tobit Tobit Tobit Tobit Tobit Tobit Tobit Tobit

Gains 2004 Gains 2004 Gains 2005 Gains 2005 Gains 2006 Gains 2006 Gains 2007 Gains 2007

Panel 1

Volume of contracts 0.009 0.008 0.041 0.041 0.129 0.105 0.075 0.068

(0.006) (0.019) (0.016)

(0.034) (0.035)

***

(0.141) (0.026)

***

(0.159)

Import dummy 3.701 4.101 10.653 11.527 27.689 29.632 30.800 33.454

(1.130)

***

(1.315)

***

(3.172)

***

(3.855)

***

(7.237)

***

(8.087)

***

(8.443)

***

(9.323)

***

Import volume 0.000 0.000 0.002 0.001 0.001 0.001 0.001 0.001

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

Export dummy 1.387 1.440 4.173 4.658 25.662 29.741 17.759 17.168

(0.512)

***

(0.553)

***

(1.402)

***

(1.690)

***

(7.185)

***

(8.254)

***

(5.610)

***

(5.732)

***

Export volume 0.000 0.000 0.001 0.000 0.001 0.001 0.001 0.001

(0.000) (0.000) (0.000)

(0.000) (0.001) (0.001) (0.000)

***

(0.001)

Mills1 1.035 1.552 10.834 10.103

(0.283)

***

(0.470)

***

(2.583)

***

(2.465)

***

Mills2 3.816 6.741 24.041 25.150

(1.172)

***

(2.201)

***

(6.138)

***

(6.823)

***

Pseudo R

0.185 0.232 0.275 0.289 0.133 0.162 0.156 0.178

Observations 12,759 12,759 12,759 12,759 12,759 12,759 12,759 12,759

Panel 2

Number of contracts 0.010 0.007 0.032 0.026 0.270 0.187 0.256 0.150

(0.008) (0.009) (0.016)

(0.024) (0.069)

***

(0.061)

***

(0.083)

***

(0.072)

Import dummy 3.696 4.101 10.625 11.511 27.721 29.748 30.746 33.512

(1.133)

***

(1.386)

***

(3.179)

***

(3.634)

***

(7.255)

***

(7.935)

***

(8.429)

***

(9.360)

***

Import volume 0.000 0.000 0.002 0.001 0.001 0.001 0.001 0.001

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

(0.000)

***

Export dummy 1.381 1.440 4.148 4.653 25.895 29.942 17.438 17.196

(0.514)

***

(0.566)

(1.412)

***

(1.606)

***

(7.235)

***

(8.331)

***

(5.541)

***

(5.616)

***

Export volume 0.000 0.000 0.001 0.000 0.001 0.001 0.001 0.001

(0.000) (0.000) (0.000)

(0.000) (0.001) (0.001) (0.000)

***

(0.001)

Mills1 1.020 1.501 10.328 9.694

(0.289)

***

(0.486)

***

(2.446)

***

(2.312)

***

Mills2 3.817 6.741 24.171 25.232

(1.229)

***

(2.063)

***

(6.130)

***

(6.751)

***

Pseudo R

0.186 0.232 0.275 0.289 0.135 0.162 0.157 0.178

Observations 12,759 12,759 12,759 12,759 12,759 12,759 12,759 12,759

Note: Tobit speciﬁcations with left truncation at the lowest observed proﬁt level in each year. For each speciﬁcation, explanatory variables correspond to

the relevant year. Robust standard errors in parentheses (bootstrapped with 500 replications when Mills ratios are included). Stars indicate signiﬁcance at

the 10% (*), 5% (**), and 1% (***) respectively.

PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 403

The crucial point is the availability of suitable instruments,

that would predict access to the procurement sector, while

being excludable from the second Eqn. (12). To generate these,

we exploit the fact that apart from raising the cost of procure-

ment and changing the identity of sellers, corruption also dis-

torts the sectorial abundance of ﬁrms. We capture this bias by

exploiting ﬁrms’ names, which are speciﬁc to the procurement

categories where a large number of ﬁrms are active.

The probit model shows that our names variables are very

strong predictors of ﬁrms being active in procurement, while

there is no reason to think that names inﬂuence ﬁrms’ proﬁt-

ability directly, supporting the excludability requirements.

Table 5 shows the results from estimating (12) on a sample

of 12,759 ﬁrms. For each year, we ﬁrst display the results from

a standard tobit estimation and then provide the results

including self-selection correction terms, with bootstrapped

standard errors. Panel 1 uses the total volume of procurement

contracts as our variable of interest Zit, while panel 2 uses the

total number of contracts.

The correction terms are strongly (jointly) signiﬁcant (at the

1% level) in all estimations. Moreover, their inclusion system-

atically induces a reduction in the estimated coeﬃcients of the

variables of interest. The marginal eﬀect of ﬁrms’ contract vol-

ume on their proﬁtability is reduced by between 9 and 19%

(except in 2005, when it remains constant), and loses signiﬁ-

cance in the last three years. Similarly, the marginal eﬀect of

the number of contracts is reduced by between 19% and

42%, and becomes insigniﬁcant in the 2005 sample. There is

thus a strong composition eﬀect, meaning that the proﬁtability

advantage of better entrepreneurs stems from an unobserved

ability diﬀerential.

We thus conclude that part of the link between procurement

and ﬁrms’ proﬁtability relates to unobserved self-selection of

the best entrepreneurs into activities that oﬀer privileged

access to the procurement sector. This provides the ﬁnal ele-

ment of our story, in which would-be entrepreneurs are likely

to be disproportionately attracted to sectors in which strong

demand from corrupt public buyers generate opportunities

for rent-seeking.

8. CONCLUSION

We have illustrated the fact that rent-seeking is costly to

development, by showing how entrepreneurs’ economic incen-

tives are distorted toward less productive activities as the

result of favoritism in the allocation of public contracts in

Paraguay. After building an entrepreneurial choice model,

we have used a large-scale microeconomic database including

all public procurement operations over a 4-year period to test

the predictions of the model. Firms have a greater probability

of obtaining a contract directly through an exceptional proce-

dure from an institution with which they have a strong con-

tractual relation, both in terms of the total value and

frequency of transactions, particularly when dealing with

more corrupt State entities. This is supported by the evidence

from a natural experiment, which exogenously increased pub-

lic scrutiny over procurement practices, and especially excep-

tion, halfway through our period of study. Firms trading

more with the public sector are more proﬁtable, even when

controlling for their unobserved characteristics. This overall

picture embodies the consequences of a systematic misalloca-

tion of talents a

`la Murphy et al. (1991).

While the results must be qualiﬁed because of the intrinsic

limitations of the data, in particular those related to corrup-

tion and to the proﬁtability of ﬁrms, we think that the paper

points to two main conclusions. First, rent-seeking is costly

because it destroys the development potential of the best entre-

preneurs. Indeed, the Paraguayan entrepreneurial class is in its

large majority imports-oriented, with over 90% of the top 500

taxpayers being importers. Over the period 1996–2005, the

commercial balance displayed an average deﬁcit of 8.5% of

GDP. Large rents linked to the resale of imported goods to

the State and the historical absence of an import-

substitution strategy have contributed to make Paraguay one

of the least industrialized economy in South America as, apart

from the soybean and meat sectors, its entrepreneurs have sys-

tematically specialized in commercial intermediation, often

with the public sector, rather than in production.

The costs of this productive atrophy and biased specializa-

tion are reﬂected in the poor record of economic growth. After

a period of signiﬁcant growth in the 1970s and early 1980s,

linked to the massive construction projects including the

hydroelectric dams, the average rate of growth of per capita

income was only 0.8% over the 1980s and strictly negative

after that (0.1% and 0.6% over the 1990s and 2000s). Over

the last two decades, the Paraguayan Central Bank indicates

that 92% of growth ﬂuctuations were due directly to ﬂuctua-

tion in agricultural production and exports. As a result, per

capita income was lower in real terms in 2005 than it was at

the beginning of the 1980s.

Second, the release on an NGO report on the abuse of

exceptional procedures, appears to have had a signiﬁcant eﬀect

as it translated in an improvement in the following period. In

that sense, civil society involvement in monitoring the public

sector use of funds appears as a crucial check on corruption.

NOTES

1. The ‘‘contracting homeland”, see for example Alfredo Boccia Paz,

Diario Ultima Hora, Asuncion, March 4, 2009.

2. Authoritative surveys on corruption include Bardhan (1997), Rose-

Ackerman (1999), Svensson (2005), Pande (2008), and Olken and Pande

(2012) among others. There is a large macro literature, staring with Mauro

(1995), while micro-econometric papers include Reinikka and Svensson

(2004), Olken (2007), Bertrand, Djankov, Hanna, and Mullainathan

(2007), Ferraz and Finan (2008), and Sequeira (2014) to mention only a

few.

3. Related papers are Rama (1993), who tracks the number of foreign-

trade rent-seeking regulations over the XXth century in Uruguay and

relates these to political and economic variables, and Fisman and Sarria-

Allende (2010), who present cross-country, industry-level evidence of the

eﬀect of regulatory distortions on the industrial structure.

4. It has lingered in the bottom 4% of surveyed countries included in

Transparency International’s Corruption Perception Index since its

inclusion in 2002. It had for instance a score of 2.1 in 2005, placing it

144th out of 158, and the same score in 2009 (154th out of 180). See Online

Appendix for general information on the country.

5. See Straub (2014) for evidence on the change in the relevance of

political connections for public procurement around the 2008 elections, in

which the Colorado party lost power.

404 WORLD DEVELOPMENT

6. For example during the period 2004–05 public ﬁrms awarded close to

90% of their advertisement contracts through exceptions. As for speciﬁc

institution, the Oﬃce of the First Lady spent respectively 40% and 93% of its

budget in these two years using the exceptional mechanism. Some cases have

made headlines, such as the use of this procedure to pay close to US$ 100,000

to a consulting ﬁrm formerly owned by the President, for the organization of

the XIIIth conference gathering Americas’ First Ladies in 2005 in Asuncio

´n

(Diario Ultima Hora, Asuncio

´n, June 7, 2007). See Mironov and

Zhuravskaya (2012) for similar stories in the Russian context.

7. Diario ABC Color, Asuncio

´n, January 3, 2010. These ﬁgures are

consistent with the estimation by Auriol (2006) and with the results in

Section 7below.

8. This assumption is consistent with existing evidence on manufacturing

and service ﬁrms in developing countries, whether they belong to the

formal or the informal sector (see Tybout, 2000). It is also consistent with

the nature of activities included in our procurement database.

9. Empirically Chong, Klien, and Saussier (2013) ﬁnd a positive

relationship between the use of negotiated procedures without prior

notiﬁcation and the weakness of governance across the European Union:

in countries more prone to corruption, public purchasers use more often

exceptional purchase. This is consistent with earlier ﬁndings by Della

Porta and Rose-Ackerman (2002) who show that in the 1990s in Italy

public authorities were abusing emergency procurement procedures to

bypass competition.

10. For instance Tran (2011), exploiting an Asian trading ﬁrm’s records

of the bribes it paid over the year to secure public contracts, shows that the

average kickback was 14.7% of the product cost when auctions were not

required. Ufere, Perelli, Boland, and Carlsson (2012) provides insights

about the supply of bribes by ﬁrms.

11. This is a common assumption in the corruption literature, going back

to the Becker and Stigler, 1974 crime-deterrence model. See for example

Besley and McLaren (1993) and Mookherjee and Png (1995).Di Tella and

Schargrodsky (2003) is an empirical application. Wade (1985) is an early

reference on the behavior of corrupt government oﬃcials, and

Elbahnasawy (2014) looks at the impact of e-government in deterring

corruption.

12. Equivalently the probability of detection increases with the share of

ﬁrms that are excluded from the rent sector, which by virtue of Eqn. (2)is

equal to ccrðbÞ

c¼b. When the number of ﬁrms that are excluded from the

rent sector bis large it increases the probability of outcry and detection

GðbÞ.

13. The monotone hazard rate property is equivalent to the log-concavity

of the reliability function 1-G(b). It turns out that most reliability

functions of standard random variable are log concave. This is true for

distributions such as uniform, normal, logistic, extreme-value, Chi-Square,

Chi, exponential, Laplace, Weibull, power function, gamma, beta, Pareto,

log-normal, Student’s t, Cauchy and F distributions (Bagnoli &

Bergstrom, 2005; Borzadaran & Borzadaran, 2011).

14. In Paraguay at the time of our study, there had been very few cases of

prosecution or indictment for corruption leading to jail time or ﬁnes.

15. Indeed under Assumption A2, 1GðbÞ

gðbÞdecreases in b, while bincreases

in ½0;1. Moreover 1

gð0Þ>0 and 1Gð1Þ

gð1Þ¼0<1 so that these two functions

cross once and only once in ð0;1Þ.

16. In the public segment, corruption implies that unit price is c. In the

private segment price is pr¼cð1brÞas the less eﬃcient ﬁrms are left to

serve private consumers. Since pr>p, quantities exchanged in the private

sector fall so that the formal productive sector shrinks.

17. Let Kð:Þand Gð:Þbe two probability functions so that gðbÞ

1GðbÞ6kðbÞ

1KðbÞ

8b2½0;1, then it implies that GðbÞ6KðbÞ8b2½0;1(e.g., see Nanda &

Shaked, 2001).

18. For instance if all procurement contracts are of similar size, we have

Q¼qRcrðbÞ

cdc, which by virtue of Eqn. (2) is equivalent to Q¼qð1bÞ.

19. See Online Appendix for more details on the diﬀerent types of data.

20. The data we use were initially painstakingly compiled by Transpar-

encia Paraguay (TP), the national chapter of the international NGO

Transparency International, using the information published on the

DNCP web site.

21. The Guarani–US$ exchange rate over the period ﬂuctuated in the

range 5,021–6,178 Gs. for 1$.

22. As a way to index it to the general evolution of prices, contract values

and thresholds are expressed in minimum daily wage (mdw) units, so for

example a 1,000,000 Gs. contract expressed in multiples of a legal mdw of

50,000 Gs. would amount to 20 mdw. See Online Appendix for more

details.

23. Systematic data on total sales, proﬁts, etc., for the whole universe of

ﬁrms could not be accessed due to conﬁdentiality restrictions.

24. FOB is the standard way to report import values without costs of

transport and other taxes, while CIF is the standard way to report export

values, including cost, insurance and freight to the national border.

25. Barbosa and Straub (2014).

26. See European Commission (2011).

27. The inclusion of ﬁxed eﬀects prevents us from using a probit

estimation, while a conditional logit would imply eliminating any pair for

which there is no within variation, therefore reducing the ﬁnal sample by

approximately half.

28. Here, identiﬁcation arises from both cross-sectional and time

variation of the amount of exception used across institution–ﬁrm pairs,

controlling for a time trend, and institution and goods time-invariant

levels (column 1) as well as institution- and good-speciﬁc time trends

(column 2).

29. Note that the identiﬁcation of the nature of the relationship between

public buyers and suppliers is beyond the possibilities of our data. It

maybe for example that public oﬃcials or their family members have

direct stakes in the supplying ﬁrms, as the anecdotal evidence suggests, or

that they operate at arm-length and share bribes.

30. Note that institution-year ﬁxed eﬀects absorb the direct eﬀect of

corruption, which is measured year by year. The pairwise correlations

between the Corrjt and the Xijt variables are 0.003 and 0.04,

respectively, so we are not worried by potential multicollinearity.

PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 405

31. Note that running the speciﬁcations of columns 1–3 on the smaller

sample of columns 4–6 conﬁrms a positive (approximately an additional

10% for a one standard value increase) and signiﬁcant eﬀect for the total

pairs’ contract value.

32. The news index might be particularly subject to caution, as press

coverage of speciﬁc institutions, based for example on journalists inquiries

or on denunciations, is likely to be inﬂuenced by the nature of the

institutions and their past behavior in procurement or other activities.

Using only the mean of the evaluations based on the Comptroller

General’s report and on the number of administrative indictments in any

given institution yields similar results though.

33. The exception if the coeﬃcient for the share of institutions’ budget

made with the ﬁrm, in column 5, which is signiﬁcant at the 10% level.

34. Note also that the other coeﬃcients support our previous insights:

the control group-speciﬁc trend b1is not signiﬁcantly diﬀerent from 0,

supporting the idea that the meaningful reduction occurs in the identiﬁed

treatment group, while b2is positive and signiﬁcant, supporting our

previous results on the fact that pairs with frequent/intense interactions

make more use of the exception in the period 2004–05.

35. Using all the observations to measure the variations in net gains, we

would have some positive measurement errors (when a ﬁrm’s tax

observation is out of the sample and therefore set at zero for one year

and is positive the following one), some negative ones (in the reverse case),

and more generally errors going either way for ﬁrms that do not make it to

the ranking of top taxpayers.

36. Note however that such endogeneity concerns are much less obvious

for variables such as the average level of corruption.

37. We do not have additional ﬁrm-level data to control for such general

characteristics. Fixed eﬀects will take care of the size issue as long as it is

reasonably constant over the period of study.

38. Results not shown here to save space indicate that the results in

columns 1 and 2 are robust to systematically controlling for the amounts

of ﬁrms’ sales to the State.

39. A technical concern has to do with tax evasion. Indeed, it is

likely that Paraguayan ﬁrms do not report all of their sales for tax

purpose, possibly biasing our estimations. One could think that sales

to the State, because they are publicly registered, imply lower rates of

evasion than other sales, in which case we may be facing an upward

bias in our estimations. However, strong anecdotal evidence rather

suggest that well-connected ﬁrms use their inﬂuence to evade a bigger

share of their tax obligations. This leads us to think that our estimates

should be considered as a lower bound on the true returns of these

ﬁrms. In other words, the fact that we still ﬁnd a positive eﬀect of

public contracts on proﬁts leads us to consider that the true eﬀect is

probably even larger.

40. The procedure, which aims to correct for the failure of the

ignorability-of-treatment assumption, is a kind of extended Heckit,

where sample selection is viewed as an omitted variable bias,

addressed by the inclusion of the Mills ratio as additional

regressors. Fafchamps and La Ferrara (2012) apply this technique

to control for individuals’ self-selection into self-help groups based

on unobservable characteristics.

41. See Online Appendix for the details on how the instruments are

deﬁned, descriptive statistics and ﬁrst stage estimations.

42. The dummies for the ‘‘construction”and ‘‘consultancy”categories

correlate negatively with proﬁts. Moreover, the results are robust to

excluding the import–export category.

43. This has also fueled a ﬂourishing and illegal reexportation business to

the neighbors Brazil and Argentina. See Straub (1998) for more details on

this.

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APPENDIX A. SUPPLEMENTARY DATA

Supplementary data associated with this article can be

found, in the online version, at http://dx.doi.org/10.1016/j.

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PUBLIC PROCUREMENT AND RENT-SEEKING: THE CASE OF PARAGUAY 407

Validating Corruption Risk Measures: A Key Step to Monitoring SDG Progress

Article

Full-text available

Oct 2023
SOC INDIC RES

The Agenda 2030 recognises corruption as a major obstacle to sustainable development and integrates its reduction among SDG targets, in view of developing peaceful, just and strong institutions. In this paper, we propose a method to assess the validity of corruption indicators within an Item Response Theory framework, which explicitly accounts for the latent and multidimensional facet of corruption. Towards this main aim, a set of fifteen red flag indicators of corruption risk in public procurement is computed on data included in the Italian National Database of Public Contracts. Results show a multidimensional structure composed of sub-groups of red flag indicators i. measuring distinct corruption risk categories, which differ in nature, type and entity, and are generally non-superimposable; ii. mirroring distinct dynamics related to specific SDG principles and targets.

Validating corruption risk measures: a key step to monitoring SDG progress

Preprint

Full-text available

Sep 2023

CURING THE NATION IN THE AGE OF COVID-19: RELIANCE ON PROCUREMENT EXEMPTION POLICY IN INDONESIA?

Article

Full-text available

Apr 2023

Cenuk Widiyastrisna Sayekti

This paper analyzes Indonesia's health sector procurement exemption policy during the Covid-19 pandemic.To respond to the current COVID-19 pandemic, it has been recognized that collaboration between competitors is necessary. However, it is also known that some collaborations will infringe on competition law if it is not handled with care. In Indonesia, the Government takes a further step by identifying necessary cooperation and excluding such cooperation from competition law enforcement based on public interest, in one instance for those within the health sector supply chain. Applying a procurement exemption policy means to line aside competition law for competitors, others within the supply chain, and various consumer groups. However, the immunity policy does not mean it will not create risks.

Electricity sector reforms and cost efficiency: The case of small electricity systems in Sub-Sahara Africa

Article

Dec 2023

The financial viability of Sub-Sahara Africa (SSA) electricity sectors has become a central energy policy issue in recent years. This follows persistent under-recovery of costs which are amongst some of the highest in the world. Discussions, however, focus on tariff and utility reforms and inadequately on costs efficiency and the role of broader sector reforms in persistently high costs. Through a synthesis of reform theories and case studies and using small electricity systems as a surrogate for liberalized electricity sectors without competitive markets, this paper examines the connection between sector reforms and costs. It brings an economic perspective to the discussion on utility financial performance in SSA electricity systems and the need for a holistic policy approach for sustainable cost-recovery. In this, we recommend the promotion of mobile power plants to facilitate contestability in generation and need for non-island small systems to participate in regional power markets to neutralize the scale limitations of their autarkic demand. Utilities and regulatory agencies should form platforms to share information on cost opportunities and possibilities to inform procurement designs and regulatory benchmarks. Regional markets could partner with national governments to develop subsidy schemes such as Contracts for Differences to remove rigidities imposed by national power purchasing contracts to promote deeper participation of small systems in regional power markets. Yardstick competition in the distribution segment remains viable in many small electricity systems and should be pursued at the regional level in the short run to medium term and at the national levels in the long term following deconcentration and the introduction of private sector participation.

RENT-SEEKING TOWARDS ECONOMIC GROWTH: EMPIRICAL STUDY IN LOWER-MIDDLE-INCOME COUNTRIES

Article

Full-text available

Jun 2023

The good effects of globalization are not felt by all countries. Lower-middle-income countries are constrained by ineffective or poorly implemented economic policies in those countries. One indicator of this ineffectiveness is the low rate of controlling rent-seeking in lower-middle-income countries. Therefore, this study analyzes the effect of controlling rent-seeking on the economic growth of lower-middle-income countries. It is important to study where economic growth has an important role in the economic development of lower-middle-income countries. This study also uses control variables such as capital formation, population, and lag of economic growth through the Partial Adjustment Model (PAM) approach. Based on the results of regression testing that has been carried out, controlling rent seeking and capital formation is known to have a positive and significant effect on economic growth in lower-middle-income countries. Meanwhile population has a negative and significant effect on the economic growth of lower-middle-income countries.

Government procurement and resource misallocation: Evidence from China

Article

Nov 2023
J ECON BEHAV ORGAN

Express packaging waste recycling: Stakeholders’ dynamic behavioral changes based on a computational evolutionary game theoretic approach

Article

Aug 2023
COMPUT IND ENG

Policía Nacional del Perú detección de riesgos de corrupción en la contratación pública

Article

Full-text available

Jun 2023

Kenyi Martinez Encarnacion

¿Es posible detectar la corrupción en la contratación pública y prevenirla? Desde la analítica de datos, este artículo propone un Indicador de Riesgo de Corrupción para identificar compras públicas probablemente sospechosas en la Policía Nacional del Perú. Este indicador de riesgo no solo revela compras supuestamente fraudulentas, o procesos posiblemente manipulados, sino que detrás hay un sistema, tan extendido en la policía como en el Estado peruano, que pocos conocen. La corrupción es un tema de personas y ética. Pero si no funciona apelar a la buena fe, siempre hay la esperanza de crear una Unidad Pre – Corrupción, que sea capaz de detectarla y anticiparla.

Incentives, audits and procurement: Evidence from a district‐level field experiment in Ghana

Article

May 2023

There is growing affinity for audits as a tool to promote political accountability and reduce corruption. Nevertheless, knowledge about the mechanisms through which audits work remains limited. While most work on audits shows that they can work via citizen sanctions of bad performers, we emphasize that audit effects can also run through prospective incentives, that is, the desire to avoid poor audit results in the first place. We distinguish audits' impact on prospective incentives and sanctions using a field experiment in Ghana; districts were randomized into audit treatment conditions targeting district procurement and oversight of development projects. We assess the effect of audits on political officials using survey experimental data and show that officials respond powerfully to prospective incentives. In districts treated with top‐down audits, in‐party favoritism falls from 60 percent at baseline to 20 percent at midline, and rates remain at 19 percent at endline. This suggests that the audit's main effect occurred before the audit results were made public, and that prospective mechanisms play an important role in audit efficacy.

Article

Full-text available

May 2023

According to the latest PIF report on the protection of the financial interests of the European Union, in 2021 Romania reported to the European Commission fraud related to European projects worth 1.4 billion euros. The reported amount is quite impressive as it represents over 80% of the total amounts reported as being fraudulently obtained in 2021 by all member states, making Romania a true performer in this regard at the European level. Starting from these values, using descriptive statistics, the study analyzes the data reported by Romania in the last ten years, compared to the other EU member states, data extracted from the PIF Reports (2012-2021), trying to verify if Romania’s status as a champion in terms of fraud with European funds is fully deserved or circumstantial. Although the numbers show that Romania is indeed a performer in this regard, both in terms of value and the number of reported cases, these values must be viewed in context, as they are influenced by a wide series of factors, including reporting errors, the capacity and willingness of member states to detect irregularities, as well as the particularities of the awarding procedures and contracting periods. Also, in the end, the paper presents some recommendations for strengthening efforts to combat the phenomenon of fraud related to EU funds in Romania.

The 2002 Business Environment and Enterprise Performance Survey: Results from a Survey of 6,100 Firms

Article

Full-text available

Jan 2003

This paper provides an overview and discusses key findings of the 2002 Business Environment and Enterprise Performance Survey (BEEPS), implemented jointly by the EBRD and the World Bank. (The first round of the BEEPS was implemented in 1999.) Four important conclusions arise from the analysis. First, qualitative measures of the business environment in the BEEPS appear to provide reasonably accurate measures, both across various business environment dimensions and countries and over time. These qualitative measures are compared with both objective statistical measures, where possible, and quantitative business environment measures from the BEEPS. Second, qualitative measures of the business environment show that in virtually all transition economies the business environment has improved significantly between 1999 and 2002. Third, the analysis of quantitative measures of the business environment shows a strong association between business obstacles, added costs and constraints on business, such as corruption, private security protection or obstacles, added costs and constraints on business, such as corruption, private security protection or reliance on internal sources of finance. However, evidence suggests that the nature of corruption in tax administration, which tends to be centralised, is less costly to firms than is corruption in business regulation, which is decentralised. Fourth, the analysis of firm investment and growth shows that the quality of the business environment in 1999 (based on qualitative measures) is significantly and positively associated with investment by firms in the period 1999 to 2001. It also shows that state capture significantly boosts the investment and real revenue growth rates of firms that engage in this activity, but holds back the growth performance of other firms.

Log-concavity property for some well-known distributions

Article

Sep 2011

Econometric analysis of cross section and panel data

Article

Jan 2002

Jeffrey M. Wooldridge

Evolución Macroeconómica del Paraguay 1989-1997: Burbuja de Consumo y Crisis Financiera

Article

Oct 1998
CEPAL REV

Stéphane Straub

Estimating the value of political connections

Article

Jan 2001

R. Fisman

Toward a Theory of Rent-Seeking Society

Article

Jan 1980

James M. Buchanan

Laws for Sale: Evidence from Russia

Article

Mar 2005
Am Law Econ Rev

Irina Slinko

How does regulatory capture affect growth? We construct measures of the political power of firms and regional regulatory capture using microlevel data on the preferential treatment of firms through regional laws and regulations in Russia during the period 1992–2000. Using these measures, we find that: (1) politically powerful firms perform better on average; (2) a high level of regulatory capture hurts the performance of firms that have no political connections and boosts the performance of politically connected firms; (3) capture adversely affects small-business growth and the tax capacity of the state; and (4) there is no evidence that capture affects aggregate growth. “oligarchy ... throws a close network of dependence relationships over all the economic and political institutions of present-day bourgeois society without exception... .” —Vladimir Lenin, “Imperialism: The Highest Stage of Capitalism” (1916)

E-Government, Internet Adoption, and Corruption: An Empirical Investigation

Article

May 2014
WORLD DEV

Nasr G. Elbahnasawy

Merchants of Corruption: How Entrepreneurs Manufacture and Supply Bribes

Article

Dec 2012
WORLD DEV

We wondered how corruption, endemic in Nigeria, is experienced by a specific and understudied set of actors—entrepreneurs. Semi-structured interviews with founders/CEOs of firms in three industries associated with high levels of corruption revealed entrepreneurs—rather than victims of bribe demanding government agents—are themselves active perpetrators of bribery, adopting a set of “bribery best practices” governed by a well-embedded set of social norms, rules, routines, and power relations to deliberately subvert formal state budgetary systems. While reforming institutions is a key focus of anti-corruption policies in many Sub-Saharan African countries, our results suggest a bottom-up approach to remediation based on understanding the practice from the perspective of those who actively engage in it.

Corruption and Government: Causes, Consequences, and Reform

Article

Jun 1999

Susan Rose-Ackerman

High levels of corruption limit investment and growth and lead to ineffective government. Developing countries and those making a transition from socialism are particularly at risk, but corruption is a worldwide phenomenon. Corruption creates inefficiencies and inequities, but reforms are possible to reduce the material benefits from payoffs. Corruption is not just an economic problem, however; it is also intertwined with politics. Reform may require changes in both constitutional structure and the underlying relationship of the market and the state. No single "blueprint" is possible, but the primary goal should be to reduce the gains from paying and receiving bribes, not simply to remove "bad apples."

Public Procurement and Rent-Seeking: The Case of Paraguay

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