UNIVERSITY of CALIFORNIA, IRVINE Applying Structural
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UNIVERSITY OF CALIFORNIA, IRVINE Applying Structural Equation Modeling to Analyze the Mutual Causality between Corruption and Trust and the Impact of Lava Jato: Evidence from Brazil and Mexico THESIS submitted in partial satisfaction of the requirements for the degree of MASTER OF ARTS in Social Ecology by Eduardo Carvalho Nepomuceno Alencar Thesis Committee: Professor John Hipp, Chair Professor Kirk Williams Professor Amihai Glazer 2020 © 2020 Eduardo Carvalho Nepomuceno Alencar DEDICATION To my spouse, Ludmilla Alencar, in recognition of her unwavering love, support, and willing sacrifice To my parents and friends in recognition of their worth “The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.” Dr. Martin Luther King, Jr. ii TABLE OF CONTENTS LIST OF FIGURES ............................................................................................................................ iv LIST OF TABLES ............................................................................................................................... v ACKNOWLEDGEMENTS ................................................................................................................. vi ABSTRACT OF THE THESIS ............................................................................................................ vii 1. INTRODUCTION ...................................................................................................................... 1 1.1. Corruption in Brazil and Operação Lava Jato (Operation Car Wash) .......................................... 2 1.2. Corruption in Mexico .................................................................................................................. 3 1.3. Corruption in American countries not involved in Lava Jato ...................................................... 3 1.4. Research Question and Hypotheses ........................................................................................... 6 2. LITERATURE REVIEW .............................................................................................................. 8 2.1. Corruption theories ..................................................................................................................... 8 2.2. Corruption perception, experience and tolerance, and trust indicators .................................. 10 3. DATA ..................................................................................................................................... 14 4. MODEL SPECIFICATION ........................................................................................................ 14 5. STRUCTURAL EQUATION MODEL RESULTS .......................................................................... 18 6. MULTIGROUP ANALYSIS IN STRUCTURAL EQUATION MODELING ....................................... 24 7. CONCLUSIONS, LIMITATIONS AND EXTENSIONS .................................................................. 28 REFERENCES ................................................................................................................................. 33 APPENDIX ..................................................................................................................................... 41 iii LIST OF FIGURES Figure 1 – Corruption Perception Index (2012 - 2018) for selected countries 4 Figure 2 – Percentage of respondents who consider corruption as the main 6 problem by selected Figure 3 – Petty corruption model 16 Figure 4 – SEM statistically significant sign results for Brazil 2016 20 Figure 5 – Corruption Experience and Trust in Local Government by selected 25 countries iv LIST OF TABLES Table 1 - Respondents who consider corruption as the main problem in the country 5 Table 2 - SEM estimation for petty corruption model (Brazil 2016) 19 Table 3 - Multiple group analysis for Model – Petty corruption 26 Table 4 - Descriptive Statistics 41 Table 5 - Pairwise correlations 43 Table 6 - Equation-level goodness of fit for model 1 (petty corruption) 44 Table 7 - Overall model fit for model 1 (petty corruption) 44 Table 8 - Results for model 1 (petty corruption), trust in local government 45 equation Table 9 - Results for model 1 (petty corruption), corruption experience equation 46 Table 10 - Model 1 (petty corruption), assessing the validity of the IVs 47 emigrate and corruption tolerance Table 11 - Model (petty corruption), assessing the validity of the IVs city size 48 and trust in political parties Table 12 - Reduced-form equation without and with the excluded instruments 49 (emigrate and corruption tolerance) Table 13 - Reduced-form equation without and with the excluded instruments 50 (city size, trust in political parties and satisfaction with public services) Table 14 - Hausman-based tests of endogeneity in the trust in local government 51 equation Table 15 - Hausman-based tests of endogeneity in the corruption experience 51 equation Table 16 - Unrestricted model for Petty corruption by groups 51 Report 1 – Instrumental Variables Tests for different groups 55 v ACKNOWLEDGEMENTS I would like to express the deepest appreciation to my committee chair, Professor John Hipp. I am grateful for the guidance and persistent support during this project. His view about data analysis and science inspired me to move forward on my academic journey. A special thanks to my committee members, Professor Kirk Williams and Professor Amihai Glazer, for the insightful and objective contributions to my research. A very special thanks to Ludmilla, my wife, who embarked with our three kids on this challenging adventure to live abroad. I thank you for your endless support, patience and love. I would like to thank my parents for the life values that they transmitted to me, making me always try to be a correct and honest person. vi ABSTRACT OF THE THESIS Applying Structural Equation Modeling to Analyze the Mutual Causality between Corruption and Trust and the Impact of Lava Jato: Evidence from Brazil and Mexico by Eduardo Carvalho Nepomuceno Alencar Master of Arts in Social Ecology University of California, Irvine, 2020 Professor John Hipp, Chair Based on data from the 2012 and 2016 America Barometer studies, this study explores the relationship linking corruption experience and trust in local government in Brazil and selected countries, and accesses the effect of the anti-corruption investigation, called Lava Jato operation, on those variables. It is employed a simultaneous equation model using instrumental variables and accounting for missing values. The findings suggest no mutual causality between citizens’ experience with corruption and their trust in the local government. However, corruption perception has a significant negative impact on trust in local government for Brazil and countries not involved in Lava Jato. Moreover, results show that respondents with leftist political ideology tend to have less trust in local government and citizens’ experience with corruption and their trust in the local government do not appear to have been significantly impacted by Lava Jato. At the time this study was conducted, there were no systematic studies on the effect of the Lava Jato operation on indicators such as corruption experience and trust in local government. vii 1. INTRODUCTION The existing literature makes clear how corruption affects the economic development of nations, thus reducing market efficiency, eroding the quality of public services, and contributing to the increase of poverty and social inequality (Jain, 2001; Kessing, Konrad, & Kotsogiannis, 2007; and Mauro, 1995). In several studies, researchers have demonstrated the relationships between corruption, economic growth, informality, illicit activities, violence/drugs, and inequality and poverty (Hameed, Magpile, & Runde, 2014; Kar & LeBlanc, 2013; and McNair et al., 2014). Corruption indisputably reduces welfare and has multiple causes and complicated dynamics that are seemingly difficult to access and address, but the risks of not acting are high (Kreuter et al., 2004). Also, corruption “involves a most intricate and elaborate labyrinth of human moral, cognitive and social processes” (Sabet, 2012, p.70) and it is an old, widespread, and multifaceted phenomenon (Sekkat, 2018) that is difficult-to-solve. Hence, the complex nature of corruption may be the reason why several anticorruption policies failed to deal with it. The estimate of the cost of corruption is also a challenge. The International Monetary Fund claims that corruption costs $1 trillion in tax revenue globally (IMF, April 2019). According to the United Nations, every year, those illicit transactions cost at least 5% of GDP, or around USD 3.6 trillion1, every year. Corrupt activities can lead to leakages of public money. As a consequence, governments will collect smaller tax revenues and/or pay higher values for goods, services or investment projects. However, the cost of corruption is larger than the sum of the lost money. According to the IMF report, distortions in spending priorities under-mine the ability of the state to promote sustainable and inclusive growth (IMF, April 2019). Corruption not only increases the cost to the economy, but also reduces the key functions of the public sector, such as tax collection or expenditure choices. If, in exchange for bribes, corrupt politicians or even civil servants facilitate tax evasion for some people or firms, others will end up facing higher tax rates, and the government may