Corruption Dynamics: The Golden Goose Effect

Development scholars view corruption as a leading cause of persistent poverty in less development countries. The paper mainly studies dynamic incentives for corruption in one of the world’s largest public transfer programs, India’s National Rural Employment Guarantee Act. The paper uncovers large embezzlement along multiple margins: theft from beneficiaries and theft from tax payers. The study makes uses exogenous changes in statutory wages to test a simple, dynamic model of rent extraction. It finds evidence for a Golden Goose effect: when expected future opportunities for rent extraction are high, official extract less rent today in order to preserve tomorrow’s opportunities. This behavioral response tends to stabilize levels of corruption in the face of external shocks. [BREAD WP no. 223]