Distributional Effects of Corruption When Enforcement is Biased : Theory and Evidence from Bribery in Schools in Bangladesh

In many models of corruption where enforcement is unbiased and the official maximizes her income, the rich are more likely to pay bribes for their children's education, implying that corruption reduces educational inequality. We develop models of bribery that reflect the fact that, in developing countries, anti-corruption enforcement is not unbiased, and higher income of a household is associated with higher bargaining power and better quality of institutions. In models of biased enforcement, the rich are less likely to pay bribes, making bribery regressive. The OLS estimates of the effects of household income are likely to find spurious progressivity in the incidence of bribery in schools. We exploit temporary rainfall shocks to provide suggestive evidence on the ability to pay effect, while long-term rainfall differences capture the combined 'poor people' and 'poor area' effects. The IV estimates show that the poor are more likely to pay bribes, and the amount paid does not depend on household income. The evidence rejects the ability to pay and related models based on unbiased enforcement and is consistent with the "refusal to pay model" of bargaining power where the rich decline to pay bribes. "Free schooling'' is free only for the rich, and corruption makes the playing field skewed against the poor