Center for Effective Global Action

Optimal fiscal policy depends on the marginal benefits of public spending. In developing countries corrupt officials often embezzle funds, so optimal policy should reflect marginal corruption. We analyze marginal corruption in the context of a statutory wage increase in India's employment guarantee scheme. Strikingly, workers received none of the increase even though initially they were on average overpaid. The data are inconsistent with theories of \voice" in which the threat of complaints limits corruption, but consistent with “greasing the wheels" theories in which (a) corruption undoes price interventions and (b) the market bounds how much rent officials can extract.