Corruption and State and Local Government Debt Expansion

• Author: Cheol Liu,Tima T. Moldogaziev,John L. Mikesell
• DOI: http://doi.org/10.1111/puar.12711
• Published date: 01 September 2017
• Date: 01 September 2017

Corruption and State and Local Government Debt Expansion 681

Public Administration Review,

Vol. 77, Iss. 5, pp. 681–690. © 2017 by

The American Society for Public Administration.

DOI: 10.1111/puar.12711.

Corruption and State and Local

Government Debt Expansion

John L. Mikesell is Chancellor ’ s

Professor Emeritus of Public and

Environmental Affairs at Indiana University,

Bloomington. His research focuses on

finances of subnational governments,

budget systems and processes, and sales

and property taxation. His textbook

Fiscal

Administration: Analysis and Applications

for the Public Sector

is widely used in

graduate public administration programs.

He holds a bachelor ’ s degree from Wabash

College and a doctorate in economics

from the University of Illinois at Urbana-

Champaign.

E-mail: mikesell@indiana.edu

Tima T. Moldogaziev is assistant

professor in the Department of Public

Administration and Policy, The University

of Georgia. He has primary interests

in subnational public finance, capital

market intermediaries, and innovations in

financial securities. In public management,

he studies organizational management,

innovativeness, and implementation of

public sector innovations. He has published

in

Public Budgeting and Finance, Public

Administration Review, Municipal Finance

Journal,

and

Journal of Public Administration

Research and Theory.

E-mail: timatm@uga.edu

Cheol Liu is assistant professor at KDI

School of Public Policy and Management,

South Korea. His research interests are

diagnosing risks in the fiscal health of

governments and identifying implementable

proposals for reform. He investigates

how public corruption distorts economic,

political, and administrative variables.

E-mail: cliu@kdischool.ac.kr

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.

Cheol Liu

KDI School of Public Policy and Management,

South Korea

Tima T. Moldogaziev

The University of Georgia

John L. Mikesell

Indiana University, Bloomington

H igh levels of public debt can threaten the

fiscal health of a government by placing a

long-term claim on the resources available

to that entity and reducing the scope for supporting

other important service demands. If debt levels are

artificially increased because of an absence of fiscal

discipline, in particular indiscipline created by public

corruption, it is a significant problem for the citizens

of that indebted jurisdiction. It is a problem not only

because of debt service that the jurisdiction must

pay going forward but also because of economic

loss resulting from the misuse of resources and the

economic opportunities that those resources otherwise

could have generated. That debt, deliberately inflated

through corrupt actions or injudicious choices in

pay-for-play schemes, may cause adverse economic

and fiscal impacts at both the subnational and

national levels. However, there is little evidence or

understanding of how corruption affects public debt,

in particular subnational public debt levels issued by

American state and local governments.

This article extends the literature on government fiscal

management by examining the impact of corruption,

manifested through rent seeking, on public debt.

Because debt issues usually involve large blocks of

money, it is easy to understand how debt could

provide attractive opportunities for corrupt financial

gain—stealing a tiny fraction of a large sum is likely

to be more profitable than stealing a fraction of a

line in an operating budget and almost certainly less

noticeable because of the opacity of the public debt

markets. It also examines how corruption hampers

the proper operations of fiscal institutions that were

designed to ensure discipline in public finances.

Corruption is defined as the “misuse of public office

for private gain” (Mauro 1995 ). There is evidence

that corruption reduces investment (Mauro 1995 )

and foreign direct investment (Wei and Wu 2001 ),

damages productivity and economic growth as a

whole (Hall and Jones 1999 ; Johnson, Kaufmann, and

Shleifer 1997 ; Kraay, Zoido-Lobaton, and Kaufmann

1999 ), diminishes the quality of procurement

services (Rose-Ackerman 1997 ), exacerbates income

inequality and poverty (Gupta, Davoodi, and Alonso-

Terme 1998 ), and increases the size of the shadow

economy (Montenegro, Schneider, and Buehn 2010 ).

Corruption also hampers the efficient and effective

resource allocation of governments. It makes public

expenditure wasteful (Shleifer and Vishny 1993 ;

Tanzi 1998 ; Tanzi and Davoodi 1997 ) and distorts

the composition of public spending to favor public

officials’ rent-seeking behaviors at the expense of social