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«Bruno Bosco2 Margherita Savona DEMS DSG University of Milan–Bicocca Piazza Ateneo Nuovo, 1 20127 Milan, Italy Abstract In this paper corruption is ...»

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1996) or to obtain favorable condition during the post-privatization period (laxed regulation, subsidies, ect.). Hence, privatization measures offer several occasions for corrupt behaviour. Hall (1999) reports several cases of corruption fuelled by government privatization in the UK, France and other European countries. According to Auriol et al. (2011) corruption in privatization, in some cases, may simply be an additional cost in the process which does not distorts the optimal privatization decisions but, in some other cases corruption not only increases costs but also distorts privatization decisions, for instance by distorting the choice of the object being privatized. Cost increasing or cost decreasing regulation becomes a crucial element in Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (OJ L 134, 30.4.2004, p. 114) and Directive 2004/17/EC coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (OJ L 134, 30.4.2004, p. 1).

Green Paper on the modernisation of EU public procurement policy. Towards a more efficient European Public Procurement Market, COM (2011) 15 final.

determining the conditions for corruption by reducing or increasing the access barriers to the market or allowing officers to exercise a certain discretionary power in regulating both the access to the tendering and the final ex-post market power of the winner. At the same time, the amount and the kind of information disclosed on competitive tendering may have positive or negative affects in terms of risk of collusion among participants (Carpinetti et al., 2006). In the case of privatization of several lots of public assets with a single multi-unit procedure, since bids may signal participants’ preferences for specific lots a full disclosure of each bid during the auction may make collusion easier.

Still, the adoption of uniform rules across EU member states about information disclosure is a useful, but so far not recommended, measure for the phase following following the conclusion of the procedure.

Our results show that corruption in privatization may result from the way in which the privatized markets in which firms will operate are regulated. Compliance costs in E[UP] may be represented by investment to be made by the winner after privatization to foster competitiveness and efficiency as required by the government. This is clearly ex-ante uncertain and the private firms may find it benefical to corrupt officers managing the privatization prosess in order to obtain a favorable regulation of the market in which they will operate. In other words, privates may win the “competition for the field” by using for corruption purposes the resources that they expect from the “competition within the field” that follows the privatization procedure. This is particularly important for IPOs privatization where it is difficult to determine a “true” initial offer values of the shares offered and government officers might embezzle state revenues to influece the privatization decisions and outcomes, and the presence of advisors and intermediaries during the entire privatization procedure can make the entire process even less transparent. When the fear of been discovered is low (low value of Θ) this implies that corruption may lead to bribing since the value of x(r) (which we may interpret as the anti-competitive behaviour after privatization) might be high too, and an high concentrated private industry should be expected after privatization. This result is consistent with that obtained in an other model of corruption in privatization by Bjorvatn et al. (2005). This notwithstanding the issue is, however, almost entirely missing from EU agenda.

4.4 Accounting standards and statutory audit for EU companies The use of International Financial Reporting Standards for consolidated financial statements of companies listed on the EU's stock markets became mandatory in 200520.

The procedures on statutory audit were harmonised21, introducing a requirement for external quality assurance, provisions on public supervision, duties and independence of statutory auditors and the application of international standards. These measures increased the credibility, quality and transparency of financial reporting, reducing the risks of corruption. Still, in the lights of (5), which states that the bribe is increasing in the specific gain of the bribee, generic recommendations for the auditing activity (transparency, good governance, economy, efficiency, ect.) look insufficent. Instead, the EU should prescribe the adoption of sector specific auditing procedure related to the Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 (OJ L 243, 11.9.2002, p. 1).

Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, p. 87).

technical or specialized operations of the department or agency being audited. For example, these issues would relate to review of specific laws and rules relating to the technical work of the department such as Income Tax Law, or Customs Law and rules and procedures framed subordinate to these laws. Following Modugu et al. (2012), once the auditors have an inventory of corruption opportunities, they should proceed to prepare a shortlist of these opportunities in the environment of the organization under audit. They should try to figure out the status of the organization or its various operations with respect to opportunities for corruption. This can be done by applying some common – across Europe – Corruption Opportunity Test which would represent a sort of benchmark procedure against which the actual audit activity can be evaluated.





The effect in many cases could be to increase the probability to discover some forms of corrupt behaviours.

4.5 Preventing and fighting political corruption Finally, let us consider the government sphere itself. As political scandals have repeatedly shown, complex connections are sometimes developed between political actors, private undertakings, media, trade associations and foundations22. These connections are driven by mutual benefits in influencing key political and economic decisions, putting democratic institutions and procedures at risk and rendering the detection of corrupt practices more difficult. Under the impetus of the GRECO monitoring process, some progress has been seen in the legal and institutional setting for the financing of political parties in several Member States. Unfortunately, the enforcement of transparency and supervision rules is still unsatisfactory in some Member States.

5. Conclusions

By partially endogenizing privates’ compliance decisions to government regulation policy and leaving ethical considerations aside, this paper provides a general theoretical analysis of the relationship between regulation, compliance, corruption and punishment.

When compliance costs are high, and so are the privates’ potential gains from non compliance, a correspondingly high corruption might be expected. Government regulation can make compliance either easy or burdersome and this enters the privates’ decision process about corruption. Indeed, in many cases high compliance costs depend upon complicated and onerous regulation prescriptions and then simplification of the rules may induce more compliance and reduce corruption by lowering the potential payoff (avoided compliance costs, net of bribes) from corrupted transactions. In a PrincipalAgent model of government-privates relationship with asymmetry of information, we have derived optimal fine structures and shown how fines should be designed to incorporate incentives for maximum compliance and minimum corruption. Under the hypothesis that bribes generate a debt-weight loss of their own – like distorsive taxes – we have also shown how this cost should be charged to agents and how the fines structure should be modified. In all, our results show that the punishment policy of corruption ought to be a carrot-stick menu of measures in which special attention should go to the compliance costs of regulation. We have finally emphasized that the extent to which the recommended European policy measures (available at the moment) Allegations of links between politicians and influential businesses or media owners have been made repeatedly in recent years, notably regarding financing of electoral campaigns.

incorporate these characteristics of the punishment tools in their guidelines to member countries is not entirely satisfying.

References Ades A. and R. Di Tella (1997), The new economics of corruption: a survey and some new results, Political studies, XLV, 496–515 Ades A. and R. Di Tella (1999), Rents, competition and corruption, American economic review, 89, 982–993 Aidt T. S. (2003), Economic analysis of corruption: a survey, Economic journal, 113, 632–652 Arin K. P., V. Chmelarova, E. Feess and A. Wohlschlegel (2011), Why are corrupt countries less successful in consolidating their budgets?, Journal of public economics, 95, 521–30 Auriol E. and S. Straub (2011), Privatization of rent-generating industries and corruption, in Rose-Ackerman S. and P. Søreide (Eds.), International handbook on the economics of corruption, Vol. II, Edward Elgar, Cheltenham, UK, 207–230 Bjorvatn K. and T. Søreide (2005), Corrupt ion and privatization, European journal of political economy, 21, 903–914 Brunetti A., G. Kisunko and B. Weder (1998), Credibility of rules and econonomic growth: evidence from a world wide private sector survey, World Bank economic review, 12, 353–384 Brunetti A. and B. Weder (2003), A free press is a bad news for corruption, Journal of public economics, 87, 1801–1824 Ciocchini F., E. Durbin and D.T.C. Ng (2003), Does corruption increase emerging market bond spreads, Journal of economics and business, 55, 503–528 European Commission (2011), Green Paper on the Modernisation of EU public procurement policy. Towards a more efficient European Procurement Market, Brussels, COM(2011) 15 final Gupta S., H. Davoodi and R. Alonso–Terme (2002), Does corruption affect income inequality and poverty?, Economics of governance, 3, 23–45 Hall D. (1999), Privatization, multinational and corruption, Report 9909-U-UCorrup.doc, PSIRU, University of Greenwich Helmy H. A. (2013), The impact of corruption on FDI: is MENA an exception?, International review of applied economics, 27, 491–514 Jain A. K. (2001), Corruption: a review, Journal of economic surveys, 15, 71–121 Johnson N., W. Ruger, J. Sornes and S. Yamarik (2013), Corruption, regulation, and growth: an empirical study of the United States, Economics of governance, DOI 10.1007/s10101-013-0132-3 Lambsdorff J. G. (2002), Making corrupt deals: contracting in the shadow of the law, Journal of economic behaviour and organization, 48, 221–241 Lambsdorff J. G. (2006), Causes and consequences of corruption: What do we know from a cross–section of countries, in Rose-Ackerman S. (Ed.), International handbook on the economics of corruption, Vol. I, Edward Elgar, Cheltenham, UK, 3–51 Lambsdorff J. G. (2007), Deterrence and constrained enforcement – Alternative regimes to deal with bribery, Universität of Passau Diskussionsbeitrag, Nr. V–60–10 La Porta R. F. Lopez-de-Silanes and R. Vishny (1998), The quality of government, NBER W.P. 6727 Lui F. T. (1985), An equilibrium queuing model of bribery, Journal of political economy, 93, 760–781 Jain A. K. (2001), Corruption: a review, Journal of economic surveys, 15, 71–121 Mauro P. (1995), Corruption and growth, Quarterly journal of economics, 110, 681– Mauro P. (1998), Corruption and the composition of government expenditure, Journal of public economics, 69, 263–279 Modugu P., N. Ohonba and F. Izedonmi (2012), Challenges of auditors and audit reporting in a corrupt environment, Research journal of finance and accounting, 3, 77– Myrdal G. (1968), An Asian drama: an inquiry into the poverty of Nations, Vol. II, Pantheon, N.Y, USA.



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