This paper studies how a formal institutional reform of the royalty resource allocation system can affect local politicians’ and rent-seekers’ corrupt behavior. Using a difference-in-differences strategy exploiting the timing of a 2011 reform to the royalty allocation system in Colombia and the cross-sectional variation of royalty allocation prior to the reform, we find that before the reform, the producer municipalities were more corrupt but reduced their corrupt behavior when the reform was implemented. We rule out that the results are explained by the producers’ loss of resources and a problem with the control agencies’ capacity and incentives to investigate the net-losers. We suggest that our main mechanism is transparency in the step-by-step process that local politicians must go through to give a contract to a rent-seeker. We find that, before the reform, illegal armed groups stole royalties through state capture and collaboration with politicians, but we found an indirect way to control it; the transparency component of the reform differentially reduced corruption in producer municipalities with the presence of illegal armed groups. Our estimates indicate that formal institutional reform that ensures transparent resource allocation through meritocratic processes can help reduce corruption and state capture by politicians and rent-seekers.
publication date
April 23, 2021 3:48 PM
Research
keywords
Analysis of Rent-seeking mechanisms in Colombia
Corruption in the municipalities that produce the SGR with the presence of illegal armed groups
Extractive economy in Colombia
Political Accountability
Reform of the General Royalties System to combat corruption in Colombia
