Capture for the Rich, Extortion for the Poor

Abstract: The paper studies the impact of tight government budget constraint on corruption. Government without adequate funding to finance its basic public services allows its employees to complete their income with bribes. It is not the same whether the complements come from capture or extortion: Extortion is less costly for the government than capture. When public budget constraints become tighter, administrations hence progressively shift from a capture-proof regime (e.g., presumption of innocence) to a regime of extortion (e.g., burden of the proof). It implies that in countries where public finances are high, corruption is low, and it rather takes the form of capture. Administrations are efficiently run. In countries where the government faces severe budget constraints, corruption is high, and takes the form of extortion. Administrations are composed of rent seekers who do not provide much effort. In the limit they become purely predatory and the government behaves exactly like a mafia. Empirical evidences are consistent with these predictions.