Corruption, Public Procurement, and the Budget Composition: Theory and Evidence from OECD Countries

This paper examines the relationship between corruption and the composition of public expenditures. First, I derive a theoretical model that links the degree of corruption in a country - to be understood as the prevailing culture of corruption - to distortions in the budget composition. The transmission channel is a rent-seeking contest where firms from different sectors pay bribes to politicians and bureaucrats to influence public procurement decisions, which give rise to endogenous rents. I then test the implications of the theoretical model with a dataset covering 29 OECD countries over the 1996-2009 period. Consistent with theoretical predictions, the relative share of expenditures on categories that involve public procurement, high-technology goods, and non-competitive markets (health and environmental protection including waste management) increases with corruption. This distortion occurs at the expense of spending categories that do not involve public procurement (social protection and recretion, culture and religion).