Tariff Evasion and Customs Corruption: Does PSI Help?

This Paper provides a new approach to the evaluation of pre-shipment inspection (PSI) programs as ways of improving tariff-revenue collection and reducing fraud when customs administrations are corrupt. We build a model highlighting the contribution of surveillance firms to the generation of information and describing how incentives for fraud and collusive behaviour between importers and customs are affected by the introduction of PSI. It is shown theoretically that the introduction of PSI has an ambiguous effect on the level of customs fraud. Empirically, our econometric results suggest that PSI reduced fraud in the Philippines; it increased it in Argentina and had no significant impact in Indonesia.