Mackerels in the Moonlight: Corrupt Politicians and Anti- Corruption Reform in Two-Candidate Elections

This paper examines causes of the persistence of corruption among elected politicians and the effectiveness of some commonly discussed anti-corruption reforms. We study a theoretical model of competition between two candidates who differ both in ability and popularity in a probabilistic voting setup. Each candidate proposes a tax rate and a public good level. The elected candidate's ability determines the cost of producing the public good. The budget constraint implies that taxes collected must equal the sum of funds used in public good production plus funds stolen by the elected politician. We solve for the tax rate and public good level chosen by each candidate and how much each candidate decides to steal. We then identify conditions under which (i) imposing constitutional constraints such as tax rate (upper) or public good (lower) limits, (ii) increasing compensation of elected politicians, and (iii) small changes in legal penalties, will reduce corruption and increase voters' welfare. We find that the designers of a successful reform need to have information that is privately held by candidates. The redistributive effects of a reform and how that would affect the popularity of the reform is discussed as well. Finally, we argue that a welfare-improving reform that would reduce the corruption may not be supported by both corrupt and honest politicians.