Economic Inquiry (ISSN 0095-2583) Vol. 40, No. 4, October 2002, 688–703 © Western Economic Association International CORRUPTION: TOP DOWN OR BOTTOM UP? CHRISTOPHER J. WALLER, THIERRY VERDIER, and ROY GARDNER* This article studies the impact of corruption on an economy with a hierarchical government. In particular, we study whether centralizing corruption within the higher level of government increases or decreases the total amount of corruption. We show that when the after-tax relative profitability of the formal sector as compared to that of the informal sector is high enough, adding a layer of government increases the total amount of corruption. By contrast, for high-enough public wages and/or an efficient monitoring technology of the bureaucratic system, centralization of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level. In the process, total corruption is reduced and the formal sector of the economy expands. (JEL D73) I. INTRODUCTION Corruption takes many forms and can arise at many levels, as pointed out by the classic study of Wade (1985). A large lit- erature has grown up since then, modeling various aspects of corruption; see the sur- veys by Bardhan (1997), Organisation for Economic Co-operation and Development (OECD) (1997), and Schneider and Enste (2000). One of the questions that this liter- ature has yet to answer concerns the struc- ture of corruption. Borrowing the language of budgeting, we can think of two struc- tures of corruption: top-down and bottom- up, as in Gardner and von Hagen (1996) and Cheung (1998). Top-down corruption refers to a setting in which corruption decisions are *We would like to thank Krister Andersson, Kaushik Basu, Steve Lewarne, Rob Masson, Michael McGinnis, Bruce J. Bueno de Mesquita, Elinor Ostrom, Eric Ras- musen, and an anonymous referee for helpful comments. Any remaining imperfections are the sole responsibility of the authors, who wrote this article as visiting faculty members at Economics Education and Research Con- sortium, National University of Ukraine, Kyiv-Mohyla Academy. Waller: Gatton Chair, Department of Economics, Uni- versity of Kentucky, Lexington, KY 40506-0034. Phone 1-859-257-6226, Fax 859-323-1920, E-mail cjwall@pop.uky.edu Verdier: Professor, Department and Laboratory of The- oretical and Applied Economics (DELTA), 75014 Paris, France. Phone 33-1-43 13 63 98, Fax 33-1-43 13 63 10, E-mail tv@delta.ens.fr Gardner: Chancellor’s Professor, Departments of Eco- nomics and West European Studies, Indiana Univer- sity, Bloomington, IN 47405. Phone 1-812-855-6383, Fax 1-812-855-3736, E-mail gardner@indiana.edu centralized in the chief of state, who then monitors lower-level officials in an attempt to collect corruption rents. Bottom-up cor- ruption refers to a setting in which corrup- tion decisions are decentralized at the level of lower officials. In this form of corruption, the chief of state is simply one among many collectors of corruption rents. A similar dis- tinction, using the same language, is made by Rose-Ackerman (1999), where “bottom-up” refers to low-level officials collecting bribes and sharing them with superiors, while “top- down” refers to corrupt superior officials buy- ing the silence of subordinates by sharing their ill-gotten gains. There is evidence that both forms of cor- ruption exist in practice, especially in various parts of the Commonwealth of Independent States (CIS). Quantitative evidence of the importance of corruption to macroeconomic performance is also available. In the latest report of the European Bank for Reconstruc- tion and Development (EBRD), the states of the CIS are found to have substantially higher levels of corruption than the states of Central Europe, the Baltic republics, and the Balkans. ABBREVIATIONS CIS: Commonwealth of Independent States EBRD: European Bank for Reconstruction and Development OECD: Organisation for Economic Co-operation and Development 688