The Impact of Public Officials’ Corruption on the Size and Allocation of U.S. State Spending

• Date: 01 May 2014
• DOI: http://doi.org/10.1111/puar.12212
• Published date: 01 May 2014

Cheol Liu is assistant professor in

the Department of Public Policy at City

University of Hong Kong. His research

agenda is to diagnose various risks in the

f‌i scal health of governments and to identify

implementable proposals for reform. The

impact of public corruption on economic,

political, and administrative variables is one

of his major research interests. He also is

interested in the responsiveness of different

revenue instruments to f‌i scal shocks.

E-mail: cheolliu@cityu.edu.hk

John L. Mikesell is Chancellor’s

Professor of Public and Environmental

Affairs at Indiana University. His research

focuses on f‌i nances of subnational govern-

ments, 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 administra-

tion 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

346 Public Administration Review • May | June 2014

Public Administration Review,

Vol. 74, Iss. 3, pp. 346–359. © 2014 by

The American Society for Public Administration.

DOI: 10.1111/puar.12212.

Cheol Liu

City University of Hong Kong, China

John L. Mikesell

Indiana University, Bloomington

 is article demonstrates the impact of public of‌f‌i cials’

corruption on the size and allocation of U.S. state spend-

ing. Extending two theories of “excessive” government

expansion, the authors argue that public of‌f‌i cials’ corrup-

tion should cause state spending to be artif‌i cially elevated.

Corruption increased state spending over the period

1997–2008. During that time, the 10 most corrupt

states could have reduced their total annual expenditure

by an average of $1,308 per capita—5.2 percent of the

mean per capita state expenditure—if corruption had

been at the average level of the states. Moreover, at the

expense of social sectors, corruption is likely to distort

states’ public resource allocations in favor of higher-

potential “bribe-generating” spending and items directly

benef‌i cial to public of‌f‌i cials, such as capital, construction,

highways, borrowing, and total salaries and wages.  e

authors use an objective, concrete, and consistent meas-

urement of corruption, the number of convictions.

This article explores the impact of public of‌f‌i cials’

corruption on the size and allocation of state

expenditures. A number of studies identify

hazardous impacts of corruption on various real sec-

tors. However, the ef‌f ect of corruption on government

spending, public resource allocation, and budgeting in

the United States has not been studied. Realization that

international development requires good governance

has directed the concern of international organiza-

tions such as the World Bank and the International

Monetary Fund to corruption

in developing countries. But

corruption of U.S. government

of‌f‌i cials is also serious.  is

article presents the f‌i rst research

on the impact of public of‌f‌i cials’

corruption on U.S. states’ spend-

ing and budgets.  e comprehensive panel data cover

the 50 U.S. states from 1997 to 2008.

Mauro (1995) def‌i nes corruption as the “misuse

of public of‌f‌i ce for private gain.” According to this

perspective, public of‌f‌i cials’ corruption seems to exist

everywhere and all the time. Unsuitable policies are

made not only because policy makers do not know

what the best policy should be but also because deci-

sion makers distort economic policies for their private

interests (Jain 2001).  e argument presented in this

article is twofold: First, public of‌f‌i cials’ corruption is

likely to increase state spending. We adopt two “exces-

sive” government growth theories, the bureaucracy

model and the f‌i scal illusion model, to hypothesize

the relationship between corruption and state spend-

ing waste. Second, public of‌f‌i cials’ corruption may

distort government’s public resource allocations.  e

empirical results show that states with higher levels

of corruption tend to spend more on items on which

corrupt of‌f‌i cials may levy larger bribes at the expense

of others.

Our corruption index is based on the number of

public of‌f‌i cials who were convicted for violations of

federal corruption laws (more than 25,000 convic-

tions are included in our panel).  e Public Integrity

Section of the U.S. Department of Justice has pub-

lished the conviction numbers on a consistent basis.

In contrast to other subjective, perception-oriented

indexes of corruption, our corruption variable is con-

crete, objective, and consistent.

Research on corruption must address concerns of

endogeneity and reverse causality. It is relevant to

wonder whether corruption alters the size and distri-

bution of government expendi-

tures or whether the magnitude

and allocation of government

expenditures cause corruption.

A number of instrumental

variables for corruption have

been used to address potential

endogeneity bias. However, scholars have not suc-

ceeded in f‌i nding both relevant and valid instruments

for U.S. public of‌f‌i cials’ corruption that are applicable

for a study covering the 50 states over a long period

of time. We solve this problem by using the system

generalized method of moments (GMM) estimation.

Distinct from other instrumental variable regression

 e Impact of Public Of‌f‌i cials’ Corruption on the Size and

Allocation of U.S. State Spending

Research on corruption must

address concerns of endogeneity

and reverse causality.