Economics

Turns out bribery doesn’t grease the wheels

It seems bribery doesn’t really expedite bureaucracy. That’s according to a paper in the World Bank Economic Review. Here’s the abstract:

Whether demands for bribes for particular government services are associated with expedited or delayed policy implementation underlies debates around the role of corruption in private sector development. The “grease the wheels” hypothesis, which contends that bribes act as speed money, implies three testable predictions. First, on average, bribe requests should be negatively correlated with wait times. Second, this relationship should vary across firms, with those with the highest opportunity cost of waiting being more likely to pay and facing shorter delays. Third, the role of grease should vary across countries, with benefits larger where regulatory burdens are greatest. The data are inconsistent with all three predictions. According to the preferred specifications, ceteris paribus, firms confronted with demands for bribes take approximately 1.5 times longer to get a construction permit, operating license, or electrical connection than firms that did not have to pay bribes and, respectively, 1.2 and 1.4 times longer to clear customs when exporting and importing. The results are robust to controlling for firm fixed effects and at odds with the notion that corruption enhances efficiency.

The paper’s title is “Deals and Delays: Firm-level Evidence on Corruption and Policy Implementation Times” and the authors are Caroline Freund, Mary Hallward-Driemeier and Bob Rijkers.

I don’t find the results too surprising over the medium or long term, as behaviourial processing speeds probably normalise to the development of a “bribery culture”. I don’t think this is incompatible with the idea that the initial bribe in a new institution, policy area, or jurisdiction may offer one-off benefits. Overall, being the first to offer a corrupt incentive (or to respond to a solicitation for one) may therefore be rational, particularly if the transaction is large and discrete. However, overall this action probably shifts expectations and therefore lowers market transparency, efficiency (and tax yields). In other words, the first guy should probably wait in line and take one for the team.

I live in hope that the Americans who slip $20 bills to bartenders as pre-emptive tips for an evening of superior service read WBER.

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Economics

The Piketty Tax is not vindicated by the failure of France’s supertax

This morning I tweeted a newspaper story telling how the French government has abandoned its 75% income tax. The government is unhappy with the tax’s meagre returns, and the negative perception of France that the tax has created. The article quotes Emmanuel Macron, the government’s own minister for the economy, who described the policy as “Cuba without the sun.”

I have never been happier to cite the Guardian. For anyone with a passing knowledge of tax policy or the Laffer curve, this outcome was entirely foreseeable. After all, it was the ludicrous top rates of income tax in the UK that drove our rockers and film stars to become tax exiles. When the rates dropped, the rich returned, with their spending, their staff, and their absurd predilection to pay extra for somebody to lower the suspension on their Range Rover Sports. As Dan Hannan, a Conservative Member of the European Parliament tweeted this morning, “Wealth taxes don’t redistribute wealth, they redistribute people” (save in the French case at least, we’re talking about an income tax).

An interesting twist is that many protest that this is exactly why Thomas Piketty, who has just refused the Legion D’Honneur, proposed a global wealth tax – so that that rich would have nowhere to which they could escape. I am not diehard enough to claim that this is impossible, but it is surely as close to impossible as one can imagine. A Piketty Tax would require unanimous global collusion in a cartel of coercion, a cartel that would not only draw the ire of the most influential cohort in every country, but which would also richly reward any defector nation with an immediate inflow of wealth. Consider the current international competition in corporation tax rates, especially between the EU states, or between the United States, as a base case. Incentives to undercut the wealth tax would likely be even stronger, because unlike businesses, who need to touch other jurisdictions in order to access their customers, wealth doesn’t need to travel. While firms like Amazon and Google need to keep some operations in high-tax but high-demand jurisdictions (if only as a profit sink), the rich need not have any such attachment.

Even if you could overcome the incentive problem of the Piketty cartel, and end international tax competition, you’d still have to find a way to coordinate and monitor the system, and to deal with perpetual travelers. If, finally, you did manage to close every possible avenue for the rich to guard their assets against government claims, then your problems would just be beginning: nobody would want to be rich any more.

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Economics

Jean Tirole takes the 2014 Nobel for Economics

This week it was announced that Jean Tirole has won the 2014 Nobel Prize Memorial Prize in Economic Sciences.

This is fantastic news for the discipline. Too often the Nobel goes to financial economists who describe models of perfectly competitive, all-knowing financial markets, emotionless, rational customers and mechanical, objective regulators. Eugene Fama, I’m looking at you.

Most human beings know that the world they experience every day rarely operates like this. Jean Tirole is one of these people. His work is based on the idea that markets are messy, and often dominated by a few large and powerful firms. His conclusion is that different markets need different types of regulation: that there is no one-size fits all for economic regulation.

There are many areas in which Tirole’s research can be applied to my everyday work with monopolies, oligopolies, patent-pools, two-sided markets, and regulators. Most importantly, by arguing that every industry needs specific and different regulations, and therefore that the development of regulation is a necessary and legitimate specialism, Jean Tirole is helping keep me in a job!

You can read the Royal Swedish Academy of the Sciences’ background piece on Tirole’s work here. It is short, interesting and the perfect topic to have in the bag if you happen to be stuck next to an economist at a dinner party.

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Economics

Statistics in PPE

I am delighted to hear, via the Oxford alumni magazine Inspires, that PPEists are soon going to have more statistics built into their syllabus. This is a result of the university being selected as one of 15 participants in the Q-Step programme to encourage statistical literacy in the social sciences.

Being able to use and understand statistical methods is essential in the making and analysis of public policy. Social science only has one laboratory, and statistics is its only instrument. I benefitted hugely from a stats course provided in alongside the PPE course during my time in Oxford. I have since topped this up through Coursera and EdX.

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