Housing Bubbles and Zoning Corruption: Evidence from Greece and Spain

The adoption of the euro in 2002 led to an unprecedented supply of cheap mortgage credit in Greece and Spain. The housing bubbles that ensued amplified developers' incentives to offer bribes for illegal construction projects. We exploit the mortgage credit windfall as the shock that induced variation in housing prices to examine the effects of the latter on zoning corruption. The empirical analysis relies on objective measures of zoning corruption at the regional level from 2003 through 2008 for Greece and from 2006 through 2008 for Spain. We employ legal indictments of zoning officials from prosecution records for Greece, which are novel to the literature, and media reports of zoning corruption scandals for Spain. Adjusting for unemployment, population, population density and college attainment, our baseline negative binomial regression estimates indicate a positive and significant relationship between housing prices and zoning corruption. Our findings are robust to a series of checks that include zero-inflated variants of the negative binomial model, and linear models that address model misspecification, omitted variables and dynamic panel bias. In the case of Spain, we are also able to analyze the sensitivity of our findings using a provincial panel that provides substantially more cross-sectional variation.