Corruption and economic activity: Micro level evidence from rural Liberia

We study how corruption affects economic activities of households in rural Liberia. A proxy of corruption of community leaders is obtained by directly monitoring the diversion of inputs associated with a development project. We measure quantities of these inputs twice; before and after the chief stored them, and interpret any ‘gaps’ between these measurements as indicative of diversion by the chief (or corruption). We use this ‘gap’ proxy to explain variation in economic behaviour across respondents, and find that corrupt community leaders cause reduced levels of income generating activities that are economically important: corruption leads to a 50% reduction in rice planted and to nearly equally large reductions in trade activity.