Corruption and Output Composition
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Corruption and Output Composition

September 10, 2019

One of the problems with corruption is
that sometimes you get the wrong outputs, the wrong kinds of output. Let’s compare two kinds
of government projects. The first kind of project is local,
small-scale, labor-intensive; imagine educating children in a village. The second kind of project is
really glamorous, it’s capital-intensive. It has a lot of hard to value
outputs and inputs. Imagine, for instance,
government building a large dam. With which kind of project is it easier
to skim money off the top? Well, when the inputs of
the project are opaque, when the project lacks transparency and when there are large expenditures
running both in and out the project. In that case, it’s probably easier
to have bribery and corruption. So what is the result of this? A lot of governments will build too
many large-scale capital projects with high value of inputs and outputs and perhaps too few small-scale, local labor-intensive outputs such as educating children in a village. And again, this is a distortion
driven by corruption. This argument came from a paper called
“Corruption” by Shleifer and Vishny.

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