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Methodology of Social Sciences (JPB 150)

Lobbying and Corruption:

Review of the relevant literature on the correlation between the two concepts and the role of regulation as a preventive measure for lobbying not to become corruption

By Anna Shabalina, Barbara Anabalon, Magdalena Montanaro and Nira Arapovic

Table of Contents

1.Introduction…….. ………………………………………………………..…….. p.2 2.Overview on the History of Literature on Lobbying …………............................p.3 3. The correlation between lobbying and corruption……… ………..………..…..p.4
3.1. Hypothesis #1- lobbying and bribery as substitutes…..…………..pp. 5-6 3.2. Hypothesis # 2- lobbying and bribery as complements…….…..…....p. 6

4. The concept of transparent lobbying…....……………………….…………......p. 7
4.1. The lobbying regulation in EU…..……..………………………..pp. 8

5.Conclusion …….................................................................................................p. 9 6.Bibliography………………………………………………………………..pp. 10-11

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1. Introduction

The practice of lobbying has been actively applied in politics throughout the second half of the 20th century. As lobbying becomes a more widely used activity, it receives more interest in the field of academic research. Corruption has been associated with political activities for a much longer period of time, and unlike lobbying, is always viewed as an illegal and unethical activity. Nonetheless, over the past few decades there has been a tendency to interrogate the correlation between lobbying and corruption, since both can influence important government decisions.

The present literature review looks at two broad areas of studies concerned with lobbying. The first part is related to the two central hypotheses about the correlation of lobbying and corruption: substitution hypothesis and complements hypothesis. The second part focuses on the regulation of lobbying and transparency policies that can ensure legal practices within the lobbying process. Before discussing these two main areas, a brief overview of the phases of studying lobbying is provided.

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2. Brief overview of the literature on lobbying

The Cambridge dictionary (2021) defines lobbying as the activity of trying to persuade

someone in authority to support laws or rules that give your organization or industry an

advantage. Nowadays, the growing interest in lobbying practices is explained by the increasing influence that lobbying has acquired particularly in the EU and USA. The number of special interest groups in the USA has been increasing over the past few years and is set to rise even further (Grossman &Helpman, 2001). As far as the European Union is concerned, Dinan and Wesselius (2010) found that there are at least 30,000 lobbyists in Brussels, which corresponds to the number of EU Commission employees. These tendencies have been growing over subsequent years.

The research in lobbying can be divided into a few phases. Initially lobbying was part of economic and game theory studies,and later became part of political science. Since the 1960s, researchers traditionally agreed that interest groups lobby the legislators who are likely to endorse their favored position. However, more recent studies using theoretical and empirical evidence have shown that this is not the case. Austen-Smith and Wright (1994), for example, argued that lobbyists target the legislators who are likely to be lobbied by a competing group and not favor their position. This phenomenon is called counteractive lobbying. With the development of technologies, scholars began to develop various models in order to derive empirical results (de Figueiredo and Richter, 2014). The most recent research shows that the initial research was quite limited and most likely missed a very important issue related to the correlation between corruption or bribery, as it will be addressed further in the paper, and lobbying.

The most recent research is still engaged with the relationship between lobbying and bribery. Additionally, authors question what will be the right type of regulation and application of transparency practices in lobbying in order to protect it from corruption. In the future researches will most likely continue applying quasi-experimental methods, as well as finding a way of quantifying the returns on lobbying (de Figueiredo and Richter, 2014). In the meantime, the present research will look into the two main parts of the research to date. The following sections will discuss the hypotheses and arguments about both activities.

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The correlation between lobbying and corruption

In the existing literature, authors generally concur that lobbying is a means of influencing state legislatures and regulatory agents in order to bend certain new laws on behalf of and for the sake of various firms and interest groups (Campos & Giovannoni, 2006; Harstad & Svensson, 2011; Goldberg, 2020). On the other hand, corruption is defined as a misuse of public office for the gains of private firms and groups (Rose-Ackerman, 2008). It is clear from the definitions above that both lobbying and corruption pursue the same final goal, which is to influence government decisions. Since both activities have the same purpose, the question arises whether they can use the same means to achieve this purpose.

While corruption is always associated with bribery as an illegal activity, lobbying, on the other hand, is associated with a more democratic tradition. The authors like Kochan and Goodyer (2011) claim that lobbying helps minority groups and businesses to be part of the government decision making process and ensures their inclusion. Mukherjee and Bhattacharyya (2016) also advocated lobbying by arguing that this activity is prohibited in countries like India and China, which are considered to be highly corrupt countries. This argument implicitly means that if lobbying does not exist in highly corrupt countries, it should not be associated with corruption. Besides Mohtadi and Roe (2003) and Fjelde and Hegre (2014) stated that democratic countries have lower levels of corruption than countries with authoritarian regimes.

Though the above-mentioned arguments attempt to make a clear geographic distinction between lobbying and corruption, they at the same time, do not exclude the possibility that lobbying can be used as a substitute of bribery in the counties with strict law enforcement. In their attempts to conceptualize the correlation between the two activities, scholars proposed two hypotheses: 1) lobbying and corruption can work as substitutes depending on certain conditions; 2) lobbying and corruption can complement each other and be integrated in the same process. The sections below provide an overview of each hypothesis and its coverage in the extant literature.

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3.1. Hypothesis # 1 -lobbying and bribery as substitutes

Given the nature of both activities, the academic literature relies heavily on the empirical research and the findings derived from cross-country comparisons. A prominent researcher in this field Goldenberg (2020) identified four main studies of private companies and their choice of either activity. The first study was conducted by Damania, Fredriksson and Mani (2004) who determined that companies tend to switch from lobbying to corruption, should political instability increase. The second study is concerned with the work of Campos and Giovannoni (2007 & 2017) who focused on both activities in post-soviet countries. The authors concluded that lobbying has a direct effect on political influence while bribery does not. Therefore, the authors suggest that lobbying is quite a complex activity to be replaced by bribery with an equal effect.

The third study relates to the work by Bennedsen, Feldman and Lassen (2009), wherein the authors researched companies in 80 countries and determined that companies who value their reputation tend not to bribe. The authors also highlighted that large firms value their reputation more, and therefore use lobbying services. The most recent study belongs to Goldberg himself, who identified a number of limitations in the existing research, and proposed his own study based on interviews of lobbyists in Germany and USA. Firstly Goldberg determined that the more access lobbyists have to the legislation, the less inclined they will be to use bribery. Secondly, he rejected the hypothesis that firm size may influence the choice of either activity. He mentioned that his findings were different from the ones by his predecessors because of the differences in methodologies. Lastly, Goldberg acknowledged that some lobbyists do use bribery. However, this choice happens at their own risk, since their reputation may be at stake.

Other influential authors in this field Harstad and Svensson (2011), argued that the level of development of a firm has an important role to play. For example, less developed firms will be more willing to use bribery since lobbying is more time-consuming and costly activity. The authors highlight an alarming tendency, which suggests that the more small companies engage in bribery, the more trapped the country will be in corrupt practices and consequently poverty.

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As it can be seen from the main studies of the substitution hypothesis, it is clear that the authors attribute the substitution effect to a number of conditions. Due to differences in methodologies, the scholars may have different results, like for example the role of the company size in the choice of either activity. Discussing the current challenges in the research, Goldberg (2020) asserted that the main difficulty remains that the scholars mostly focus on the legal aspect, while there are more profound contextual differences between the two. Therefore,the authors recommend further research to determine consistencies across the research.

3.2. Hypothesis # 2 - lobbying and bribery as complements

The second main hypothesis that is widely discussed in the literature states that lobbying and bribery complement each other. Damania et al (2003) argued that lobbying can be used to undermine the most critical laws, which then gives way to bribery and corruption. By using their model for empirical research the authors determined that if bribery is used even once during the process of lobbying, it will have irrevocable results,and will have to be used repeatedly in the future. Grossman and Helpman (2001) highlighted that apart from using bribery,lobbyists may use other corrupt techniques, such as blackmail and threatening politicians to disclose damaging information to the voters. His research is more aimed at interaction of lobbying with the executive branch rather than legislative. At the same time, he does not deny that lobbying can be easily integrated into corruption.

Goldberg (2020) argued that lobbyists, if they are not afraid for their reputation, may easily commit to corrupt activities and use them throughout their career. In their most recent study, Cerqueti, Coppier and Piga (2021) determined that lobbying and bureaucratic corruption can coexist depending on various circumstances and the political structure in a country. Like with the first hypothesis, the authors apply different methodologies and do a number of interviews with the most prominent lobbyists. Nonetheless, a serious limitation to the study is that the subject is quite sensitive, and there is a likelihood that the respondents will not be honest about their activities. Though further research is under process, the scholars equipped with their findings came to a consensus that proper regulation in a country may solve many issues related to converting lobbying into corruption (Chamber, 2016; Labutkova & Zak, 2018; Goldberg, 2020).

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4. The concept of transparent lobbying

Apart from the academic literature, it is also important to turn attention to the surveys that were made in the EU region on attitudes towards lobbying and corruption. For example, a Czech journalist Horálková (2007) wrote that about 70% of Czech citizens believed that the politicians in the country are influenced by corruption. Transparency International Global Corruption Barometer (2013), found that 6 out of 10 European citizens considered that their respective governments were seriously influenced by the interests of particular groups. On the other hand, according to a survey by Marsteller (2013), among 600 European parliamentarians and officials, 89% agreed that lobbying, provided it is a transparent and ethical activity, helps in policy making.

Transparency International released a report (2015), wherein it stated that interactions between lobbyists and public officials should be transparent and always open to public debate. Additionally, the report states that there should be clear and explicit standards of ethical conduct abided by both lobbyists and public officials. Lastly, the public decision-making process should be open to the plurality of voices, which would represent a variety of interests and not only the interests of one particular group. In other words, everybody should be granted access.

The Transparency International Report (2015) also shares some important findings. Firstly, it states that attempts by governments and lobbyists to promote open and ethical lobbying standards remain sporadic and ineffective. Besides, most of the influence mechanisms remain hidden and informal. Finally there are serious conflicts of interest, and certain groups enjoy much more privileged access to the legislature than others. The above -mentioned findings indicate that lobbying is still highly vulnerable to become part of the corruption process or to substitute for corruption.Those findings are echoed in the research on transparency of lobbying. The authors call for stricter regulation and compliance.

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4.1. The lobbying regulation in EU

The first challenge is that lobbying is concerned with multiple sectors such as private, public, non-profit and legal advisory. Each of them influences public policies in certain ways. As far as European Union is concerned, Dinan and Wesselius (2010) found that there are at least 30,000 lobbyists in Brussels, which is equal to the number of EU Commission employees. Many of those lobbyists do not register as independent agents, which may have negative consequences for the regulation of lobbying and control of corruption. Therefore, the authors see regulation, or more specifically mandatory registration of lobbyists as the most plausible solution (Chamber, 2016; Bunea & Gross, 2019; Goldberg, 2020).

Labutkova and Zak (2018) argue that proper regulation of lobbying activities will enforce its role in democracy rather than let it dive into corruption. According to the authors, transparent regulation will help minimize such challenges as asymmetric information, moral hazard and lack of knowledge. Chamber (2016) in his research, examined a few reforms, which can potentially improve transparency of lobbying in the EU. The first recommendation is to make the transparency registration in the EU compulsory for all lobbyists. This position is widely shared across the literature on regulation. Additionally, he proposed that control and supervision should be performed by independent authorities, and not bureaucrats. The records should also be available to ensure no hidden information exists. These recommendations are echoed in Transparency International Report (2020).

Holman and Luneburg (2012) compared the regulation of lobbying in the EU and USA and

found that the EU still lags behind in the regulation practices, and needs to enforce lobbyists’

registration. Goldberg gave the example of the scandal with Philipp Amthor, who was the member of Bundestag and at the same time lobbied the interests of a US company in Germany. This scandal around illegitimate lobbying practices , according to Goldberg, once again highlights that until now the issue of corruption in lobbying is not solved.

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5. Conclusion

Based on the hypotheses and arguments discussed in the present paper, it is safe to assume that there is a strong link between corruption and lobbying. Nonetheless, the methodologies of the authors vary, and so vary their findings. The studies of substitute and complements hypotheses are very important because they help identify under what conditions lobbying can be converted into corruption. One fact that the authors discussed in this paper are in agreement about is that proper regulation should be enforced in order to prevent lobbying from becoming corruption and make it support democracy and inclusion in countries.

With regards to the transparency practices of lobbying, a number of scholars as well as surveys highlight that the number of lobbyists in the EU has been increasing significantly. At the same time, many of those lobbyists are not registered, which may potentially lead to the risk of involving lobbying into corruption. Following this, the main recommendation of this review is 1) to continue research on the correlation between lobbying and corruption, and 2) to enforce more transparent lobbying practices to prevent the integration of corru[tion into lobbying activities.

6. Bibliography

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Alter-EU, Bursting the Brussels Bubble: The Battle to Expose Corporate Lobbying at the Heart of the EU (Bruselas: Alter-EU, 2010), pp.114-122

Austen-Smith, D., & Wright, J. (1994). Counteractive Lobbying. American Journal of Political

Science.

Cambridge Dictionary (2021). Cambridge University Press. https://dictionary.cambridge.org/ Cerqueti, R., Coppier, R. & Piga, G. (2021). Bribes, Lobbying and Industrial Structure. Ital Econ Journal.

Damania, R., Fredriksson, P. G., & Mani, M. (2004). The persistence of corruption and

regulatory compliance failures: theory and evidence. Public Choice.

De Figueiredo, J.M., & Kelleher, R.. (2014). Advancing the Empirical Search on Lobbying, vol. 17. Annual Review of Political Science.

Dinan, W. & Wesselius, E. (2010). A Lobbying Paradise, in Bursting the Brussels Bubble.

ALTER EU, Brussels, Belgium.

Giovannoni, F. & Campos, N. F. (2006). Lobbying, Corruption and Political Influence. Bronn,

Institute for the study of labor.

Goldberg, F. (2018). Corruption and lobbying: conceptual differentiation and gray areas.

Crime Law Soc Change. Grossman, G. & Helpman, E. (1994). Protection for Sale. American Economic Review vol. 84.

Harstad, B. & Svensson, J., (2011). Bribes, Lobbying and Development. American Political Science Review, 105(1).

Holman, C., Luneburg, W. (2012). Lobbying and transparency: A comparative analysis of regulatory reform. Int Groups Adv, vol. 1.

Kochan N. & Goodyear R. (2011) Forces Fighting Bribery. In Corruption. Palgrave

Macmillan, London.

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Laboutkova, S. & Zak,M. (2016). Transparency of lobbying: a theoretical approach.

Economic Policy in the European union member countries. Czech Republic.

Marsteller,B. (2013). A Guide to Effective Lobbying in Europe: The View of Policymakers.

London. Rose-Ackerman, S. (1975). The Economics of Corruption. Journal of Public Economics, vol.4.

Spiegel, P. (2013). Dalli and the Bribery Scandal that won't go Away, Financial Times.

Transparency International. (2013) Global Corruption Barometer (Berlin: Transparency International, 2013).

Transparency International, 2012.“Ex-Austrian MEP Imprisoned in Lobbying Scandal”,

EurActiv.com, 15 january 2013. Transparency International (2015) (ISBN: 978-3-943497-80-9), Dra. Suzanne Mulcahy, www.transparency.org/EuropeLobbying

Gilens, M. & Page, B.I. (2014). Testing Theories of American Politics: Elites, Interest Groups,

and Average Citizens, Princeton University, Perspective on Politics, Vol. 12/No. 3.

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  • Corruption, Taxation, and Tax Evasion

    Corruption, Taxation, and Tax Evasion

    Tulane Economics Working Paper Series Corruption, Taxation, and Tax Evasion James Alm Yongzheng Liu Department of Economics School of Finance Tulane University Renmin University of China [email protected] [email protected] Working Paper 1802 March 2018 Abstract In this paper, we examine the relationships between corruption, taxation, and tax evasion. We examine three specific questions. First, on a general level, what do simple empirical analyses suggest about some of the causes and the consequences of corruption? Second, on a more specific level, what do similar empirical analyses indicate about the relationship between corruption and taxation? Third, on an even more specific level, what is the relationship between corruption, taxation, and tax evasion? We conclude with a discussion of how this evidence can be used to control corruption, making use of a different if related body of work on tax evasion. Keywords: Corruption, tax evasion, behavioral economics, controlled field experiments, laboratory experiments JEL codes: H2, H26, D73 Corruption, taxation, and tax evasion James Alm1 and Yongzheng Liu2 Abstract In this paper, we examine the relationships between corruption, taxation, and tax evasion. We examine three specific questions. First, on a general level, what do simple empirical analyses suggest about some of the causes and the consequences of corruption? Second, on a more specific level, what do similar empirical analyses indicate about the relationship between corruption and taxation? Third, on an even more specific level, what is the relationship between corruption, taxation, and tax evasion? We conclude with a discussion of how this evidence can be used to control corruption, making use of a different if related body of work on tax evasion.
  • The Institutional Economics of Corruption and Reform: Theory

    The Institutional Economics of Corruption and Reform: Theory

    This page intentionally left blank The Institutional Economics of Corruption and Reform Theory, Evidence, and Policy Corruption has been a feature of public institutions for centuries, yet only relatively recently has it been made the subject of sustained sci- entific analysis. In an important contribution to this ongoing project, Johann Graf Lambsdorff shows how insights from institutional eco- nomics can be used to develop a better understanding of the institutions necessary to carry out corrupt transactions and those that are helpful in inhibiting them. He argues that rather than being deterred by penalties, corrupt actors are more influenced by other factors such as the opportunism of their criminal counterparts and the danger of acquiring a reputation of unreliability. This suggests a novel strategy for fighting corruption – the ‘‘invisible foot’’ – whereby the unreliability of corrupt counterparts induces honesty and good governance even in the absence of good intentions. Combining interdisciplinary theoretical research with state-of-the-art empirical investigations, this book will be an invaluable resource for researchers and policy-makers concerned with anticorruption reform. johann graf lambsdorff is Chair in Economic Theory at the University of Passau, Germany, and Senior Research Consultant to Transparency International. He is the founder of the Corruption Perceptions Index, Which he has orchestrated since 1995. The Institutional Economics of Corruption and Reform Theory, Evidence, and Policy JOHANN GRAF LAMBSDORFF CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521872751 © Johann Graf Lambsdorff 2007 This publication is in copyright.
  • Can a Lack of Control Over Corruption Determine Tolerance Levels?

    Can a Lack of Control Over Corruption Determine Tolerance Levels?

    To Tolerate or not Tolerate Bribery: Can a Lack of Control over Corruption Determine Tolerance Levels? Patty Zakaria, PhD1 Abstract Most of the research on corruption has either focused on the impact corruption has on economic growth, development, and investment, or the implications of corruption on governance. However, limited research has focused on the relationship between government control of corruption and individual-level acceptance of bribery within society. This study uses the World Values Survey and other observed data from a total of 55 countries to test whether high levels of corruption cause individuals to be more accepting of bribery among public officials. A Generalized Least Square Model was applied to test the effect of government corruption on control and individual-level tolerance for bribery between 1996 and 2015. Keywords: GLS, Control of corruption, Individual-level tolerance, Bribery, Rule of Law. 1 [email protected] The opinions expressed and arguments employed herein are solely those of the authors and do not necessarily reflect the official views of the OECD or of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. This paper was submitted as part of a competitive call for papers on integrity, anti-corruption and inclusive growth in the context of the 2018 OECD Global Anti-Corruption & Integrity Forum. 1. Introduction Academics and policymakers have jointly agreed upon the definition of corruption as the abuse of public goods for private gains, and have acknowledged its negative effect on governance, society, and the economy.
  • Causes and Consequences of Corruption: an Overview of Empirical Results

    Causes and Consequences of Corruption: an Overview of Empirical Results

    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Enste, Dominik; Heldman, Christina Research Report Causes and consequences of corruption: An overview of empirical results IW-Report, No. 2/2017 Provided in Cooperation with: German Economic Institute (IW), Cologne Suggested Citation: Enste, Dominik; Heldman, Christina (2017) : Causes and consequences of corruption: An overview of empirical results, IW-Report, No. 2/2017, Institut der deutschen Wirtschaft (IW), Köln This Version is available at: http://hdl.handle.net/10419/157204 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu IW-Report · 2/2017 Causes and Consequences of Corruption – An Overview of Empirical Results Authors: Prof. Dr. Dominik H. Enste Telefon: 0221-4981-730 E-Mail: [email protected] Christina Heldman Telefon: 0221-4981-554 E-Mail: [email protected] 25.