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The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs

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  • Farzana Alamgir
  • Johnny Cotoc
  • Alok Johri

Abstract

Sovereign spreads and the level of bureaucratic diversion of government spending vary widely across emerging economies and are correlated with each other. We build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services in order to explain these facts. The diversion policy parameters are estimated using data on public resources and monitoring efficiency and used to calibrate the model. We use data on the average gift needed to be given to win public contracts in a country as a measure of bureaucratic diversion because it allows us to quantify diversion of public resources whereas tax evasion is hard to measure. We tie down the efficiency level to the Rule of Law index. We show that economies with low monitoring efficiency display higher diversion levels and higher default risk (and spreads) than those with higher efficiency. These results emerge because defaults reduce diversion levels and this benefit from default is higher for low monitoring efficiency economies, which encourages default.

Suggested Citation

  • Farzana Alamgir & Johnny Cotoc & Alok Johri, 2022. "The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs," Department of Economics Working Papers 2022-07, McMaster University.
  • Handle: RePEc:mcm:deptwp:2022-07
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    Cited by:

    1. Farzana Alamgir & Alok Johri, 2022. "International Sovereign Spread Differences and the Poverty of Nations," Department of Economics Working Papers 2022-06, McMaster University.
    2. Dooyeon Cho & Dong‐Eun Rhee, 2024. "Determinants of market‐assessed sovereign default risk: Macroeconomic fundamentals or global shocks?," International Finance, Wiley Blackwell, vol. 27(1), pages 35-60, April.

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    More about this item

    Keywords

    sovereign default; country spreads; bureaucratic corruption; bribes; provision of public goods;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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