Impact of Corruption Revelations on Expenditures: Empirical Analysis Based on Prefectural Data in Japan

Corruption is a mechanism for individuals with budgetary authority to gain profits on an individual basis, instead of directing or allocating profits (funds) to a specific organization. It is incompatible with public interest and distorts the efficient allocation of resources across society as a whole. Especially, there are two cases of emerging wasteful expenditure. First, total expenditures increase when allocating new funds. Second, when funds for specific fields increase, fund allocation may become inefficient. This paper uses statistical data to examine the relationship between the presence of corruption and increase in expenditures, while paying attention to the fact that the presence of corruption is not known until it comes to light. Much of the previous research uses cross-country data, which has limitations in that it fails to account for the differences in fiscal systems between countries. In view of that, the novelty of this paper lies in its use of Japan’s domestic data. For the first time, this paper uses data on prefectures in Japan to test the impact that revelations of corruption have on expenditures (total expenditures, civil engineering budget, and successful bid rate). The estimated results show that there is a possibility that expenditures are restrained after revelations of corruption. In addition, the analysis on the impact of revelations of corruption from the political situation suggested that the effect of expenditure reduction from revelations of corruption tends to be more restrained among local governments with governors who received a high percentage of votes in the elections (low percentage of votes for other competing candidates). These results imply that, depending on the political structure, revelations of corruption do not necessarily lead to immediate cuts in expenditure, and that attention should also be given to the actions of governors.