# **2.1 Corruption**

One definition of corruption could be “[t]he abuse of entrusted authority for illicit gain” (Norwegian Agency for Development Cooperation 2008). This could include both subjective and objective measures. For instance, corruption might range from bureaucratic corruption to a broader notion that further includes nepotism, patronage networks, fraud, conflicts of interest, bribery, embezzlement, extortion, favoritism, and political corruption (Johnston 2005). Given the complexity of capturing this variable, there exists a lot of debate on how to appropriately measure it.

In this paper, we try to capture the different elements of corruption by considering more than one measure. In particular, the dependent variable is based on three subjective indicators of corruption: _i_ ) the Corruption Perception Index (CPI); _ii_ ) the Control of Corruption Governance Metric (WGI CC); and _iii_ ) the Government Effectiveness Governance Metric (WGI GE). We also consider another measure of corruption: the International Country Risk Guide (ICRG). As shown in Hamilton and Hammer (2018), the survey-based indicators (in particular, the CPI and the WGI CC indicator) are the most valid measures of overall corruption in many country contexts. However, and in line with the existing literature on corruption, Hamilton and Hammer (2018) suggest to cross-check the results when using one measure of corruption with the use of additional indicators, as significant differences exist in the construction of these measures.<sup>5</sup> So far, no consensus on the optimal measure of corruption has been reached.

The CPI, an annual index published by Transparency International since 1995, defines corruption as the misuse of “entrusted power for private benefit” (Transparency International, 2011). It ranks countries by the perceived levels of public sector corruption, as determined by expert assessments and opinion surveys.<sup>6</sup> In particular, the CPI is a composite index based on a combination of surveys and assessments from 13 different sources, with each individual indicator of corruption standardized to have the same weight in the aggregate score.<sup>7</sup> As the CPI measures only public sector corruption, two additional subjective

> 5Besides ICRG, other objective measures of corruption exploit variations in conviction rates (Fiorino et al. 2012, Hill 2003) or press reports (Rehren 1996). However, these methods remain mostly unsystematic, thus leading to validity and reliability problems (Morris 2008, p. 390).

> 6As mentioned by Eurostat: “As there is no meaningful way to assess absolute levels of corruption in countries or territories on the basis of hard empirical data, capturing perceptions of corruption of those in a position to offer assessments of public sector corruption is so far the most reliable method of comparing relative corruption levels across countries.”

> 7The main weakness of this measure is that the number of sources used to construct it varies over time, especially pre-2012. However, because the CPI uses sources from the last three years preceding each publication of the index, it is still possible to use the CPI year average to make comparisons over short periods of time (Persson and Tabellini 2003). There is a very strong significant correlation between the CPI and other proxies for corruption: black market activity and an overabundance of regulation (Wilhelm 2002),

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