declarations by inspectors. Section 7 provides estimates of the costs of corruption in terms of tax losses. Section 8 characterizes the inspectors and brokers who are corrupt and the distribution of tax revenue losses. Section 9 validates our approach by analyzing the impact of the delegated randomization intervention. Section 10 concludes.

# **2 Context: Customs Clearance Process in Madagascar**

This section describes the customs clearance process and argues that the conditions in Toamasina are conducive to systemic corruption: there are few players who interact repeatedly, the stakes are high, and there is almost no punishment for improper conduct.

Taxes and duties collected by customs accounted for 48 percent of overall tax revenue in Madagascar in 2019, despite substantial tariff evasion (Chalendard et al., 2019). Most of this revenue was collected in Toamasina, which accounted for 78 percent of non-oil tax revenue and 52 percent of non-oil imports and employed on average 16 inspectors per year during our sample period. Each inspector oversees the collection of 17 million USD worth of tax revenue per year on average, representing 1.3 percent of total taxes collected.

Jobs in the customs administration - especially inspector jobs in Toamasina - are among the most sought-after jobs in Madagascar. They are secure, well-paid, and offer several benefits. Inspectors earn a salary of roughly 11,000 USD per year (21 times annual GDP per capita of 527 USD) and receive as bonus 5 to 20 percent of the tax adjustments they impose when they detect non-compliance.<sup>7</sup> They can also earn performance bonuses of up to 1,000 USD per quarter if they are among the top inspectors in terms of clearance speed, fraud detection, and tax revenue mobilization. Inspectors thus get paid efficiency wages and have strong personal financial incentives to detect non-compliance, which should help deter corruption.

However, these performance rewards may not sufficiently incentivize inspectors to act with integrity. Corruption appears pervasive, possibly due to the virtual absence of sanctions for improper conduct, threats from economic operators, and because compensation is low relative to opportunities for graft (Chalendard et al. 2020). According to a nationwide survey of inspectors that we conducted in 2017, only 23 percent believe that their colleagues act with integrity, only 6 percent claim non-ethical behavior is sanctioned and only 12 percent believe promotions are merit-based. Close to a third of inspectors claim being subjected to threats from economic operators on a regular basis. Undervaluation of imports was widely agreed to be the main type of customs fraud in Madagascar.<sup>8</sup> The inspectors in Toamasina interact with a limited number of customs brokers ( _commissionnaires agrées_

> 7Note that inspectors’ pay does not vary mechanically with the total taxes they collect.

> 8Administrative data on fraud records classify 67.2 percent of all fraud in Madagascar customs as underreporting of value, 27.4 percent as underreporting of quantities, and the remainder as product misclassification (4.9 percent) or misreporting country of origin (0.5 percent).

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