More Transfers, More Corruption - Here Is the Political Resource Curse
We are used to local governments calling for money from the centre and developing countries calling for money from rich ones, but among the side-effects of windfall revenues there are a rise in corruption, a worsening quality of political candidates and a higher probability of reelection for the incumbents, even when they "grab more rents" – academic jargon for stealing money.
Four economists from Università Bocconi, Fernanda Brollo, Tommaso Nannicini, Roberto Perotti and Guido Tabellini in The Political Resource Curse (NBER Working Paper No. 15705), using three Brazilian datasets, find that "a 10% increase in the federal transfers to municipal governments raises local corruption by 17% (broad definition, possibly including bad administration) or by 24% (narrow definition, with only severe violation episodes). Moreover, this fiscal windfall increases the incumbent's mayor probability of reelection by 7% and shrinks the fraction of his opponents with a college degree by 7%".
The most important financial source for Brazilian municipal governments is a program of federal transfers determined by population size in a discontinuous way: the transfers leap when population exceeds certain thresholds. It is thus possible to compare municipalities with similar population sizes, but positioned slightly behind or slightly beyond the threshold and thus receiving different amounts of money. The researchers have information about this program as well as about the reports of local government audits carried out in accordance with an anti-corruption program and biographical and electoral information on the incumbent mayors and their opponents in municipal elections.
They can thus check their model, which combines the literature on windfall resources and rent-seeking, theories on the selection of politicians and studies on the allocation of talents in economies characterized by different incentives to different types of talents.
When seeking reelection, according to the model, the mayors face a trade-off between grabbing more rents and complying with the electors' wishes, giving them services and resources. The electors don't know in how much grabbing the mayors indulge, but can measure the resources trickling down to citizens and rate the mayors by them. When municipalities receive more money, there is more room for political rent-grabbing, while more resources trickle down to citizens, not denting their opinion of the mayor. The corruption consequently increases (moral hazard effect).
Political rents, the authors assert, are more valuable for candidates of lower professional ability, having poorer career alternatives and lower opportunity costs. When corruption increases politics becomes more attractive for these people, triggering off a selection effect that impoverishes the quality of the candidates in the race for mayor (in terms both of the share of opponents with a college degree and of their average years of schooling). Facing less able opponents, the newly corrupt mayor has a higher probability of reelection. The Brazilian data validate the model.
If, in this regard, the authors can write of a political resource curse similar to the natural resource curse, they nonetheless warn that their results "are non inconsistent with higher transfers to municipalities increasing the quantity and quality of public services provided to local populations", as shown by other researchers working with the same Brazilian dataset.