Political Risk, Information and Corruption Cycles: Evidence from Russian Regions

Political budget cycles are a well-established phenomenon in which opportunistic politicians systematically adjust public policies prior to elections in order to attract a higher number of votes. We show that corrupt behavior of politicians also follows certain patterns, which are driven by electoral cycles. Based on Business Environment and Enterprise Performance Survey data, exploiting variation in the dates of surveys and in length and starting date of Russian regional governors' terms, we find that corruption levels, as perceived by firms operating in different regions of Russia, increases closer to the expected expiration date of a regional governor's term. We argue that the Russian political system allows governors to accumulate private information about their likelihood of remaining in office for another term. Therefore, they will know well in advance of elections if they continue in the office for the next term. We suggest that the accumulation of such information may serve as an explanation for the observed pattern of perceived corruption: if a governor gradually learns that he is leaving office once the current term has expired he has increasing incentives to engage in corrupt activities in order to accumulate wealth before he is out of the game. We formalize this idea with a simple theoretical model and test it. We find that in regions where incumbent governors are less likely to remain in office for the next term, corruption increases over their terms, while in regions where governors are more likely to remain in office, perceived corruption follows a decreasing trend.