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The Corruption Problem ……… COPYRIGHT AND USE OF THIS THESIS This thesis must be used in accordance with the provisions of the Copyright Act 1968. Reproduction of material protected by copyright may be an infringement of copyright and copyright owners may be entitled to take legal action against persons who infringe their copyright. Section 51 (2) of the Copyright Act permits an authorized officer of a university library or archives to provide a copy (by communication or otherwise) of an unpublished thesis kept in the library or archives, to a person who satisfies the authorized officer that he or she requires the reproduction for the purposes of research or study. The Copyright Act grants the creator of a work a number of moral rights, specifically the right of attribution, the right against false attribution and the right of integrity. You may infringe the author’s moral rights if you: - fail to acknowledge the author of this thesis if you quote sections from the work - attribute this thesis to another author - subject this thesis to derogatory treatment which may prejudice the author’s reputation For further information contact the University’s Director of Copyright Services sydney.edu.au/copyright The Law and Econom(etr)ics of Corruption Robert Brent Davis A Thesis Submitted in Fullfillment of the degree of Doctor of Philosophy Faculty of Law University of Sydney 2015 1 Acknowledgements The preparation of any substantial piece of work – especially a doctoral thesis – is necessarily the primary responsibility of the author/candidate. However, it is not the outcome of work-in-isolation. My journey of doctoral candidacy and scholarship has benefited from the advice, encouragement and support of two important groups of people: . firstly, my supervisors, Prof Mark Findlay and Prof Jennifer Hill of the Faculty of Law, University of Sydney, whose advice and constructive criticisms have acted as a valuable source of guidance at important junctures and milestones; and, . secondly, and by no means least, my family especially Cheryl (wife) and Alexandra (daughter) whose encouragement and support made the long and sometimes lonely hours of reading and writing that much easier. Finally, it has shown me that a kid from a working-class background – Loftus Primary, Engadine High, in southern Sydney – can take on an ideal, a personal challenge to reach the heights of the scholarly achievement in Australia, a Doctor of Philosophy (in Law) from the University of Sydney. 2 “The servants of the nation are to render their services without any taking of presents …”.1 1 Plato, The Laws, 349. 3 Table of Contents Chapter 1: Introduction and Overview … 12 Introduction ……………………………………… 12 Controlling Corruption ……………………………… 16 Law and Economics ……………………………… 20 Empirical Legal Analysis ……………………………… 29 Critical Readers ……………………………… 32 Analytical Purpose of the Thesis ……………………… 34 Chapter 2: The Corruption Problem ……….. 37 Introduction …………………………….... 37 Categorisation of Corruption ……………….. 39 Areas of Vulnerability ……………………………… 50 Causes of Corruption ………………………………. 53 Consequences of Corruption ……………….. 62 Ongoing Debates ………………………………. 77 Policy Tools to Address Corruption …………………. 81 Summary and Conclusion …………..........……… 100 Chapter 3: International Law and Corruption …. 104 Introduction ………………………………… 104 The International Law ………………………………… 106 Natural Law ………………………… 108 Positivism .………………………… 109 4 Sources of International Law ………………………… 110 International Treaties ………………… 112 International Custom ………………… 114 Decisions of Juristic Bodies ………… 116 Juristic Works ………………… 117 Decisions of International Institutions … 118 Other Sources ………………… 119 Subjects of International Law ………………………… 121 States ………………………… 121 Non-State Persons ………………………… 124 International and Municipal Law ………………… 127 Tackling Corruption under International Law ………… 128 Definitions ………………………… 132 Jurisdiction ………………………… 137 The Public Sector ………………………… 139 The Private Sector ………………………… 142 Criminal Offences ………………………… 144 Enforcement and Sanctions ………… 148 Scholarly Commentary ………………………… 150 Summary and Conclusion ………………………… 155 5 Chapter 4: Theories of Law and Economics ….. 162 Introduction ………………………… 162 The Law in Law and Economics ………………… 166 The Economics of Law and Economics ………..………… 170 The Chicago School …………… 174 The Austrians …………………………. 184 The New Haven Perspective …………… 190 The Public Choice (Virginia) School ……… 192 Institutional Law and Economics …………… 197 Neo-Institutional Law and Economics …… 202 Other Schools ………………………………………… 205 Critical Legal Studies ……………………… 205 Rational Choice ………………………… 208 Behaviorialism ………………………… 214 Game Theory ………………………… 221 Empirical Legal Studies ………………… 229 International Law and Economics …….……………… 232 Theories of Law, Economics and Corruption …………. 237 Criticisms of Law and Economics ……………… 243 Summary and Conclusion ………………………… 247 6 Chapter 5: The Law and Economics of Crime …. 252 Introduction ………………………………… 252 Criminal Behaviour ………………………………… 255 Enforcement ………………………………… 258 Punishment ………………………………… 261 Deterrence ………………………………… 267 A Market for Criminal Activity ………………….. 272 Law and Economics of Regulation and Corruption ……. 274 Public Interest Theory …………… 277 Private Interest Theory …………………… 280 The Regulation – Corruption Nexus …….. 287 Summary and Conclusion ………………….... 289 Chapter 6: Modelling Corruption …………… 293 Introduction ………………………………… 293 Leximetric Modelling ………………………………… 295 The Data Set ………………………………… 302 The Aggregate Model ………………………… 307 Descriptive Statistics ………………… 308 Tests of Equality ………………… 311 Analysis of Variance ………………… 313 Structural Breaks ………………… 317 Breakpoint Tests ………………… 321 Parameter Stability ………………… 325 7 Regime-Shift Specification ………… 329 Summary and Conclusion ………… 333 Three Countries (Time Series) ………………… 335 Descriptive Statistics ………………… 336 Analysis of Variance, and Tests of Equality … 338 Auto-Correlation …………………… 339 Breakpoint Tests …………………… 340 Parameter Stability …………………… 342 Dummy Variables …………………… 346 Regime-Shift Specification …………… 347 Summary and Conclusion …………… 348 Three Countries (Regressions) …………………… 350 Explanatory Variables …………………… 351 Correlations …………………… 352 General-to-Specific Modelling …………… 355 Parameter Stability …………… 359 Summary and Conclusion …………… 365 Summary and Conclusion ……………..…… 366 8 Chapter 7: Summary and Conclusion … 370 Introduction ……………………………………… 370 The Corruption Problem ………………………………. 371 International Law ……………………………………… 375 Law and Economics ……………………………… 378 Modelling Corruption ……………………………… 383 Analytical Challenges ………………………………. 385 Appendices ………………………………………… 389 Bibliography ………………………………………….. 423 9 Tables and Figures Table 2.1 Typologies of Corruption ……………………… 47 Table 2.2 Causes and Consequences of Corruption ……. 75 Table 3.1: Current Instruments and their Antecedents ... 158 Table 6.1: Categorical Allocation of Countries ........... 305 Figure 6.1: Corruption in Developed Countries I ........... 310 Figure 6.2: Corruption in Developed Countries II ........... 310 Table 6.2: Tests of Equality ............................................ 312 Table 6.3: Pairwise ANOVA ............................................ 316 Table 6.4: Correlogram of Average Corruption ........... 319 Table 6.5: Lagged Perceptions of Corruption ........... 320 Table 6.6: Chow Breakpoint Test ................................. 322 Table 6.7: Year Dummy Variables ................................. 323 Table 6.8: Quandt-Andrews Breakpoint Test ........... 325 Figure 6.3: CUSUM Test ............................................ 328 Figure 6.4: CUSUM Squares Test ................................. 328 Table 6.9: Regime-Shift Specifications ...................... 331 Figure 6.5: Corruption in Three Countries ...................... 337 Table 6.10: Partial Auto-Correlations ...................... 339 Table 6.11: Basic Regressions for Three Countries ........... 341 Figure 6.6: CUSUM Results for Denmark ...................... 343 Figure 6.7: CUSUM Squared Results for Denmark ........... 343 10 Figure 6.8: CUSUM Results for the United States ........... 344 Figure 6.9: CUSUM Squared Results for the United States ............................................ 344 Figure 6.10: CUSUM Results for Italy ................................. 345 Figure 6.11: CUSUM Squared Results for Italy ........... 345 Table 6.12: The OECD Convention’s Effect in Three Countries ....................................................... 346 Table 6.13: Correlations Between Corruption and 13 Explanatory Variables ............................................ 353 Table 6.14: Summary of General-to-Specific Modelling Sequences ............................................ 357 Figure 6.12: Denmark CUSUM ................................. 361 Figure 6.13: Denmark CUSUM Squares ...................... 361 Figure 6.14: Italy CUSUM ............................................ 362 Figure 6.15: Italy CUSUM Squares ................................. 362 Figure 6.16: United States CUSUM ................................. 363 Figure 6.17: United States CUSUM Squares ...................... 363 11 Chapter 1: Introduction and Overview “.... corruption is not a new phenomenon. It is as old as government itself.”2 Introduction Corruption has become a deep-rooted feature of many economies and societies around the world3. Amongst the main drivers of this spread, and deepening, of corruption are shortcomings in economic and political governance, in market institutions, in public administration, and in
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