Fiscal Slack, Rule Constraints, and Government Corruption

• Published date: 01 September 2022
• Author: Wenchi Wei
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/puar.13299

850Public Administration Review • September | Oct ober 20 22

Research Article

Abstract: This article examines the effect of fiscal slack on government corruption using the US states in the

period from 1998 to 2012 as a research sample. Fiscal slack in the US states is commonly referred to as “rainy day

funds” (RDFs), which are intended as countercyclical reserve funds for government-wide purposes. Theoretically,

bureaucracy models predict that fiscal slack might catalyze the embezzlement or misuse behaviors of bureaucrats, who

are considered to be budget maximizers. However, formally established and rules-bound RDFs may function as a

“strongbox” that curbs officials’ discretionary power, reduces uncertainty in fiscal slack management, and ultimately

restrains embezzlement and misuse behaviors. Empirically, we use the incidences and durations of natural hazards

as instrumental variables for RDF balances to address the potential endogeneity problems. We find that state RDFs

help reduce government corruption, especially when they are regulated by relatively looser deposit rules and stricter

withdrawal rules.

Evidence for Practice

• State RDFs function as a “strongbox” for governments’ unspent budgetary resources and negatively affect the

degree of government corruption.

• A one-standard-deviation increase in per capita RDF balances reduces corruption-related convicted officials

per million population by approximately 3 or, measured in an alternative way, reduces corruption-related

convicted officials per thousand government employees by approximately 44–50.

• The efficacy of state RDFs in curbing government corruption is contingent on the associated rules of

operation. Specifically, RDFs bound by relatively looser deposit rules and stricter withdrawal rules reduce

government corruption to a greater extent.

In a representative democracy, voters delegate

part of public authority to elected political

representatives through collective decisions

with the expectation that officials will operate in

government on their behalf and efficiently provide

public goods (Barro1973). Government officials,

including elected politicians and their appointed

bureaucrats, are anticipated to be trustworthy and

to promote public welfare (Zhang and Kim2018).

Government corruption, which is commonly

defined as the engagement of government officials

in illegal activities that abuse the public authority

related to their office to pursue private benefits

(Liu and Mikesell2014; Nelson and Afonso2019;

Tavits2007), undermines core democratic values

and erodes public trust toward public institutions

and governments (Anderson and Tverdova2003;

Zhang and Kim2018). Moreover, many previous

studies have found government corruption

to be detrimental to economic development,

productivity growth, private investment,

and social and economic equality (Friedman

etal.2000; Hall and Jones1999; Jain2001;

Knack and Keefer1995; Mauro1995, 1998;

Rose-Ackerman1997; Villoria, Van Ryzin, and

Lavena2013; Zhu and Zhang2017).

Although corruption is not as serious in the United

States as it is in developing or transitioning countries

in Africa, Latin America, and Asia (Transparency

International’s report of Corruption Perceptions

Index in 2017 ranked the United States 16th across

the globe), it is never a trivial problem (Liu and

Mikesell2014). According to reports by the Public

Integrity Section (PIS) of the US Department of

Justice (DOJ), 30,726 federal, state, and local officials

were convicted of violating federal corruption-related

laws in the period from 1976 to 2014. Figure1

illustrates the total number of convicted officials

by year and the predicted linear trend with 95%

confidence intervals. There was a general trend of

increasing corruption convictions during the sample

period, with a dramatic deviation from the trend in

the late 1980s and early 1990s.

Wenchi Wei

Renmin University of China

Fiscal Slack, Rule Constraints, and Government Corruption

Wenchi Wei is assistant professor at the

School of Public Administration and Policy

at Renmin University of China. He holds

a PhD in public policy and administration

from the Martin School at the University

of Kentucky. His research focuses on

public management and performance,

public budgeting and finance, and policy

evaluation. His research has appeared

in

Public Administration Review

,

Public

Management Review

,

American Review of

Public Administration

,

Public Performance

and Management Review

, and other

journals.

Email: weiwenchi@ruc.edu.cn

Public Administration Review,

Vol. 82, Iss. 5, pp. 850–865. © 2020 by

The American Society for Public Administration.

DOI: 10.1111/puar.13299.

Fiscal Slack, Rule Constraints, and Government Corruption 851

Scholars from multiple disciplines have found a mass of evidence

on the causes of government corruption. The previous studies

generally focus on the factors of socioeconomic conditions, cultural

and religious characteristics, political institutions, electoral systems,

law enforcement, and bureaucracy structures (Alt and Lassen2003,

2008; Chang and Golden2007; Treisman2000, 2007). As noted by

scholars, the most serious government corruption is closely related

to or directly incurred by government fiscal management and

budget-making (Liu and Mikesell2014; Motza1983). However,

the effects of fiscal and budgetary factors on government corruption

remain largely unexplored. Moreover, most previous studies fail to

solve the potential endogeneity problems in empirical analyses.

This article contributes to related literature as follows. First, this

article focuses on fiscal slack, or so-called “rainy day funds” (RDFs)

in the US states, and its effect on government corruption. State

RDFs are formally established fiscal reserves during fiscally sound

periods for use in times of fiscal crises and revenue shortfalls

(Hou and Duncombe2008; Hou and Moynihan2007; Wei and

Denison2019). The maintenance and operation of RDFs is an

important facet of government fiscal management and budget-

making for the US states. Second, in the empirical analysis, we

take into account potential endogeneity problems and use an

instrumental variable estimation to address them. Last, unlike most

previous studies, which use one-year cross-sectional data, this article

uses a panel data set of the US states for 15 years as the empirical

sample. This approach further improves the quality of evidence

from a statistical perspective.

The remainder of this manuscript is organized as follows. Section

two summarizes related literature. Section three theoretically

addresses how fiscal slack and the associated rule constraints can

affect government corruption and proposes testable hypotheses

accordingly. Sections four and five introduce the research

methodology and variables. Section six reports the empirical results.

The last section concludes the article and discusses its practical

implications and potential limitations.

Related Literature

There are three main strands of literature on the causes of

government corruption. Cross-country studies generally adopt

a macrolevel approach and examine the influence of a variety of

institutional factors on government corruption at national level

(Zhang, Jancsics, and Graycar2019a). These studies predominantly

use survey-based subjective perceptions to measure government

corruption (Nelson and Afonso2019; Silitonga et al.2019; Zhang,

Jancsics, and Graycar2019a). The second strand of literature uses

the US states as the research sample and, with a few exceptions

(Alt and Lassen2003, 2008; Boylan and Long2003), generally

measures government corruption with the number of convicted

corrupt officials. The third strand of literature embraces an

individual-level perspective and usually uses large-scale surveys to

examine the effects of various behavioral or psychological factors

such as professional ethics, peer behavior, intrinsic motivation, and

bureaucrat recruitment and training, on government corruption

(Silitonga et al.2019; Zhang et al.2019b; Zhang, Jancsics, and

Graycar2019a).

Among the first strand of related literature, Treisman(2000)

systematically investigates a variety of potential determinants of

government corruption, positing that officials will take a cost-benefit

analysis of engaging in corruption by taking into account the expected

gains, probability of being caught, and severity of punishment.

Treisman(2000) finds that corruption is less prevalent in countries

with higher numbers of Protestants, a history of British rule, higher

GDP, a free economic market, a more centralized political system,

and longer exposure to democratic institutions. These findings are

generally confirmed by a review study of Treisman(2007). Some

cross-country political science studies specifically attend to the

political factors related to government corruption. The factors that

are highly focused on include political stability, the parliamentary

or presidential system, the degree of democratic practices, and

electoral systems (Gerring and Thacker2004; Lederman, Loayza, and

Soares2005; Montinola and Jackman2002).

With regard to the second strand of literature, evidence on the

causes of government corruption in the context of the US states has

increased in recent decades since the seminal studies of Goel and

Rich(1989) and Meier and Holbrook(1992). Goel and Rich(1989)

find that a higher probability of being caught and more severe

punishments deter public corruption. Meier and Holbrook(1992)

systematically examine a wide array of potential causes of government

corruption, and they demonstrate that historical, cultural, and

political forces are relatively more powerful in predicting corruption

in the US states. In addition, Goel and Nelson(2011) show that

fiscal decentralization negatively relates to government corruption

while government fragmentation facilitates corruption. Moreover,

Alt and Lassen(2003) argue that political institutions can shape

the extent to which voters can hold politicians accountable and

find substitutes for incumbent politicians in future elections. In

another study, Alt and Lassen(2008) find that a divided government

enhances the separation of powers and checks and balances between

officials and, therefore, reduces government corruption.

Concerning the third strand of literature, public administration and

management scholars have increasingly adopted an individual- or

organizational-level perspective to examine bureaucratic corruption

Figure 1 Total Number of Convicted Officials by Year (1976–

2014).

Notes: Data are derived from the annual reports submitted to Congress by the PIS

of the US DOJ