Honors Thesis

1. Analysis of Gap Between Incidence of Corruption and Corruption Perception Index Honors Thesis SaadSarfraz

2. Definitions Corruption (World Bank) The abuse of public office for private gain (World Bank) Corruption (Operational) Corruption is the intentional non-compliance with the arm’s-length principle aimed at deriving some advantage for oneself or for related individuals from this behavior (Begovic, 2005) Corruption Perception Index The CPI is a composite index, making use of surveys of business people and assessments by country analysts(Lambsdorff,2007) Economic Governance The processes that support economic activity and economic transactions by protecting property rights, enforcing contracts, and taking collective action to provide appropriate physical and organizational infrastructure (The New Palgrave Dictionary of Economics, Second Edition, 2008) Incidence Rate of Occurrence of influence ( Merriam Webster Online)

3. Introduction CPI and Incidence Perception vs. Reality Conflicting Opinions Forward and Backward Linkages CORRUPTION PERCEPTION INDEX

4. Indices and Indicators Global Corruption Barometer Transparency International Worldwide Governance Indicators World Bank World Bank Enterprise Surveys World Bank Global Corruption Report Business International Index of Corruption Bribe Payers Index Transparency International

5. Significance of the Topic Business Manager International Business Opportunities Risk and Country profile Analysis Policy Makers Government Revenue Increased Transparency Effective Governance

6. Theoretical Framework CPI = f( Incidence , Bias ) Tax to GDP (Instrumental ) Cross Section CPI Micro Data from ICVS Equations CPI = β0+β1ICVS + u1 ICVS(instrument) = β0 +β2Tax to GDP Ratio +u (INSTRUMENTAL VARIBLE) CPI = β0+ β1ICVS (Instrument)+ u2 u2 – u1 = BIAS CPI = θ 0 + θ 1 ICVS ( Inst) + θ3 Bias + u (Have you or a Member of your family paid a gift payment to a public official in the past year)

7. Equation 1 (Basic CPI-ICVS Relationship) CPI = f (Incidence, Bias) CPI = β0 + β1 ICVS + µ1 CPIest = 0.32 + 2.26 ICVS (6.67)t-stat (5.71) t-stat (0.0000)prob (0.0001) prob ε1 = CPI – CPI est (Bias + Disturbance) = (Incidence + Bias) - ( Incidence+ Disturbance) ε 1 = Bias + Disturbance

8. Equation 2(Instrumental; Cleaning Disturbance/separating Bias) Instrumental variable of ICVS takes in effect of all omitted variables Tax to GDP ratio Correlated to Incidence but not to Perception ICVSInstrumental = β0 + β1TaxtoGDP + µ2 ICVSest = 0.31 - 0.0119 TaxtoGDP (5.50)t-stat (-4.24) t-stat (0.0000)prob (0.0001) prob

9. Equation 3 (Estimating Bias) CPI = β0 + β1 ICVS Instrumental + µ CPIest = 0.273 + 2.94 ICVSInstrumental (3.77)t-stat (4.15) t-stat (0.0010)prob (0.0000) prob ε2 = CPI - CPIest (Disturbance) = ( Incidence + Bias) – (Incidence + Bias + Disturbance) ε2 = (Disturbance) ε1 = (Disturbance + Bias) ε1 – ε2 = BIAS

10. Equation 4 (Estimating Magnitude of Bias) CPI = θ0 + θ1 ICVS + θ2BIAS +µt CPI = 029 + 2.67 ICVS + 0.4 BIAS (5.59)t-stat (5.71) t-stat (1.53) t-stat (0.0010)prob (0.0000) prob (0.1392) prob We fail to reject Null Hypothesis

11. Hypothesis Proposition There is a significant Gap Between the Incidence of Corruption and Corruption Perception Index Study Objective To highlight if there is a Gap between Incidence and Perception of Corruption Hypothesis H0 : θ2 = 0 Ha : θ2≠ 0

12. Data Collection Procedures Year 2000 (Cross Sectional) Corruption Perception Index Source : Complied by Transparency International from 14 different data Sources Score Varies Between 0 (Corrupt) – 10 (Clean) Inverse of CPI taken Divided by Highest score to get values b/w 0-1 Tax to GDP Ratio An Instrumental Variable for ICVS Source: World Development Indicators (WDI) International Crime Victim Survey (ICVS) Source: Compiled By UNICRI Question used Dichotomous to Average Conversion

13. SAMPLE INCLUDED United Kingdom Belgium Canada Denmark France Netherlands Ireland Portugal Sweden United States of America Korea Colombia Azerbaijan Belarus Bulgaria Croatia Czech Republic Poland Russia Ukraine Uganda South Africa Zambia Estonia Australia Japan

18. Conclusion Subjective Assessment Opinion based survey vs. Reality Based Survey Survey Biases might also be present in ICVS

19. References Husted B. W. 1999. Wealth Culture and Corruption. Journal of International Business Studies, Vol 30 pp. 339-357. Dreher & Schneider. 2006. Corruption and the Shadow Economy: An Empirical Analysis presented at Annual Meeting of Public Choice Society New Orleans Louisiana. Chatterjee & Ray. 2009. Does the Evidence on Corruption Depend on how it is measured. Department of Economics Monash University Australia. Abramo.C.W, 2008. How Much Do Perceptions of Corruption really tell us Economics e-Journals Vol.2 . Aidt. S. T. 2004. Analysis of Corruption a Survey The Economic Journal, Vol. 113, No. 491, pp. F632-F652 Micheal B. 2004 Explaining Organizational Change in International Development: The Role of Complexity in Anti- Corruption Work Journal of International Development Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1126

20. Transparency International. 2007. 2007 Transparency International corruption perceptions index: An index of perceptions of business people of corruption around the world. Unpublished document released June 2. . 2007. Internet corruption perception index - Home page. http://www.gwdg.de/uwvw/icr.htm Lambsdorff.J .G. 2007. The Methodology of Corruption Perception Index. Unpublished document released by Transparency International Lambsdorff .J .Graf 1997. An empirical investigation of bribery in International trade. Paper presented at the Workshop on Corruption and Development, Institute of Development Studies, May 6-7, Sussex, United Kingdom. Heidenheimer, A. J. 1996. The topography of corruption: Explorations in a comparative perspective. International Social Science Journal, 158(3): 337-47. Gatti, R. & R. Fisman (1999), ‘Decentralization and Corruption: Cross-Country and Cross-State Evidence’, mimeo, Development Research Group, World Bank. Tanzi, Vito (1980) The Underground Economy in the United States: Estimates and Implications. Banca Nazionale Del Lavaro. (Quarterly Review). Dec. Rose-Ackerman, Susan. Corruption: A study in political economy. New York: Academic Press, 1978. Besley, Timothy & McLaren, John. "Taxes and Bribery: The Role of Wage Incentives." Eco-nomic Journal, January 1993, 103(416), pp. 119-41.