Sunday, January 22, 2012

A survey paper on corruption

Corruption in Developing Countries by Ben Olken and Rohini Pande(a short summary in Lifting the curtain on corruption in developing countries) has the following intriguing passage:

"In some cases one can use the theory of market equilibrium, combined with data on market activity, to estimate the amount of corruption. In a pioneering study, Fisman (2001) applied this approach to estimate the value of political connections to Indonesian president Soeharto. Specifically, he obtained an estimate from a Jakarta consulting firm of how much each publicly traded firm was “connected” to Soeharto, on a scale of 0-4. He then estimated how much each firm’s price moved when Soeharto fell ill to estimate the stock market assessment of the value of those political connections. If the efficient markets hypothesis holds, then the change in stock
market value surrounding these events captures the value of the political connection to the firm. Since investment bankers in Jakarta estimated that the total market would fall by 20 percent if Soeharto died, he can calibrate these estimates to estimate the total “value” of the connections to Soeharto. On net, for the most connected firms he estimates that about 23 percent of their value was due to Soeharto’s connections.

The Fisman market approach is replicable in any case where one has data on firms’
connections to prominent politicians and when the politician experiences health shocks. For example, Fisman et al (2006) has replicated the same approach for the United States, looking at the value of connections to former U.S. Vice President Dick Cheney, using shocks while he was a candidate and while he was in office. In a marked contrast with the Soeharto paper, he finds zero effect of Cheney’s heart attacks on the value of Cheney-connected stocks."
P.S. 'Intriguing'? Halliburton, KBR, and Iraq war contracting: A history so far via TomDispatch

No comments: