Culture as the antidote to a spiral of corruption.

A rule of thumb which has been hard to measure and difficult to empirically validate but usefully true nonetheless - the more regulation, the more corruption. A paper attempts an analysis. From Does Greater Regulatory Burden Lead to More Corruption? Evidence Using Firm-Level Survey Data for Developing Countries by Mohammad Amin and Yew Chong Soh. From the Abstract.

Regulation often creates opportunities for public officials to extract bribes. If this is true, deregulation offers a simple way to combat corruption. However, empirical evidence on the corruption and regulation nexus is limited. Further, the corruption indices used are based on experts' opinions, which may suffer from perception bias. The present paper attempts to address these shortcomings using firm-level survey data for 131 mostly developing countries on the experiences of the firms with bribery and regulatory burden. Exploiting within-country and industry-level variation in regulatory burden, the analysis finds a large, positive effect of regulatory burden on corruption. For the baseline results, the bribery rate is higher by about 0.03 percentage point for each percentage point increase in the regulatory burden. The finding is robust to several endogeneity checks.

A lot of room for debate and quibbling but useful to have even preliminary data supporting what seems to be experientially patently true.

I would love to see a similar type study at the city level in the US. As rich and prosperous as we are, my suspicion is that we might be 10-30% richer simply through regulatory reform, simplification and reduction of corruption at the city level.

Cities are disproportionate contributors to efficiency and therefore prosperity. Cities tend also to be disproportionate generators of crippling regulatory burdens which in turn breed corruption, strategic and tactical, personal and institutional.

There is a central paradox which makes corruption difficult to stamp out except by public morals.

The more money and power is concentrated within the state, the broader and deeper the spectrum of personal and institutional interests there are who wish to establish protected rents via government capacity to create regulatory protections. The justification is always in public interest terms.

Hopefully a reasonably neutral example - A green group advocates that every property development or land use change in city limits requires an environmental impact statement which costs $10,000. You can tell a good story about why this might be a good idea. The second order consequences are easy to ignore.

The reasonably direct corruption is that most environmental studies are done by allies of environmentalists. Environmental impact companies have a strong motivation to fund the campaign of environmentalists because the regulation will create a much larger and more stable demand for their services. They are seeking rents via well-intentioned regulation.

Obviously there is a direct but incidental corruption arising from this new regulation. However, the indirect costs are much harder to see but likely much more consequential.

On the demand side, in general, an additional charge of $10,000 to a $500,000 home will not have nearly as large a suppression on demand as will a charge of $10,000 on a home that costs $100,000 to build. The demand elasticity impact of a 10% increase in cost versus a 2% cost increase is much more consequential.

Therefore, such a regulation creates direct corruption by increasing market demand for something that is coercively imposed. It creates an indirect corruption by effectively subsidizing the high end home segment of the market and dramatically constricting demand for the low cost home market. You want housing inequality? Require an environmental impact statement.

The third order corruption arises when homeowners and property speculators begin circumventing the requirement for an environmental impact statement by either bribing the state inspectors or by resorting to low cost providers of environmental impact statements who may actually only be creating the certificate of statement rather than actually doing the environmental impact work itself.

The fourth order effect effect is to reduce small builders from the market (their finances are more fragile and they re less able to bear the burden of additional regulatory costs compared to the big, well-financed firms.

A fifth order effect is to start a new round of regulation in order to address the negative consequences of the first round of regulation. In this instance, the relative cost impact consequences of an environment impact statement reshape market demand so that poor people are forced out of the residential market. Complaints about an absence of affordable housing leads to either demands for rent control or to affordable housing set asides to big developers.

On ad infinitum the circles of corruption and unintended cost consequences spreads wider and wider with no one seeing or acknowledging the aggregating cost and failure. All because of a plausibly well-intended regulation. Everyone see the plausibility and rationale of the regulation and no one acknowledges the costs. The stakes are high and the money is there. Corruption and failure follows.

It seems to me that the states with the highest regulatory burdens also have the highest corruption levels and that in turn drives lower economic growth, productivity, higher resident exodus rates, etc.

The regulations seem like a good idea and no one is gauche enough to acknowledge the costs except gauche free-market enthusiasts, fringe small-government enthusiasts, etc.

The system of corruption incentives drives itself into the ground unless constrained by a strong shared framework of bourgeoise values such as integrity, thrift, responsibility, transparency, diligence, work ethic and the like. Things hard to legislate but absolutely critical to constraining the corruption cycle.