Trade in regulatory decisions : a study of market regulation and corruption in OECD countries

Abstract

Corruption and its harmful consequences is often described as a developing country problem, but there are reasons to believe that corruption risk is present in developed countries as well. This thesis aims to study the association between corruption risk and the extents of market regulation in OECD countries. We argue that expected government intervention may create an arena for political corruption due to the discretionary authority of politicians and regulators, and the insufficient mechanisms to monitor their decisions. When profit or market power is at stake, firms in regulated markets also have incentives to unduly influence regulatory decisions by colluding with politicians or regulators. We find that the risk of corruption in OECD countries seems to be higher when markets are more heavily regulated. To measure the extent of market regulation, we use new data from the OECD called the Services Trade Restrictiveness Index (STRI). Our findings are robust to two different corruption indicators, and a complementary analysis using data from the World Bank’s Doing Business surveys. We also discuss and control for the effects of several market and institutional characteristics related to regulatory environments. Our findings underline the need for a better understanding of the full consequences of market regulation in the presence of corruption risk, and support the need for more international collaboration to combat corruption. Furthermore, our findings suggest that extending the mandates of competition authorities could strengthen law enforcement at the national level.