Corruption and State and Local Government Debt Expansion

Abstract

Theories describing rent seeking in the public sector posit a number of negative fiscal outcomes that the choices of corrupt officials may generate. The evidence presented in this article shows that states with greater intensities of public corruption have higher aggregate levels of state and local debt. If corruption in the 10 most corrupt states were only at an average level, their public debt would be 9 percent lower, or about $249.35 per capita, all else being equal. Notably, institutional control measures may not have succeeded in restraining the expansion of state and local public debt in the presence of greater levels of corruption. State and local governments would achieve more efficient levels of fiscal discipline by curbing public sector corruption. Practitioner Points• Curbing public corruption can help state and local governments reduce the amount of public debt and the extra costs that the debt markets inflict on more corrupt jurisdictions. • The issuance of long-term private-purpose debts is affected more seriously by corruption, which invites closer attention of policy makers to this market. • Curbing corruption helps institutional control measures work as they are designed and, as a consequence, restrains the expansion of public debt.

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