Factor Endowments and Institutional Specialization: Why Some Countries Have Different Forms of Corruption Than Others

Abstract: Do countries specialize institutionally? A burgeoning literature investigates links between economic specialization and institutions, arguing that countries possess institutional comparative advantages (Treffler-Nunn 2013). This work builds on theory arguing that institutions provide the incentive structure for economic activities (North 1990), distribute economic resources (Acemoglu-Robinson 2005), or determine business opportunities (Hall-Soskice 2001). In these arguments, institutions do not only shape economic activity; economic and institutional environment coevolve in a symbiotic relationship. Institutions influence which activities are developed, while emergence of specialized organizations, technology, and concentration of economic power feeds back in to the institutional setting, adapting it to prevailing patterns of economic activity. Thus, institutions evolve to support existing economic specialization. While the channel from institutions to specialization has been studied extensively, this latter part of the symbiotic relationship remains understudied. More importantly, the empirical literature does not reflect the theoretical notion that differences in economic structure may relate to different types of institutions. This paper shows that sectoral specialization induces institutional specialization. Economies invest in combating those types of bribery that are comparatively harmful to their dominant economic activities. Empirical support comes from cross-country variation in the distribution of bribery over various branches of the public sector. By decomposing sectoral structure in its sources (tangible vs. intangible investment), which are affected differently by various forms of bribery, we link bribery types to different economic activities. Using historical variation in factor endowments as instrument for sectoral specialization, we show that the direction of causality runs (partly) from sectoral specialization to institutional specialization.