PRIVATIZATION and CORRUPTION1

This paper offers a theory of how the degree of corruption that prevails in a society responds to changes in the ownership structure of major public service providers. We show that there are cases where private ownership, even though it fosters investments in infrastructure, also opens the door to more corruption. The public dissatisfaction towards privatization is crucially affected by this degree of corruption. Our model thus helps understand the seemingly paradoxical situation prevailing in Latin America, where most studies find that privatizations have been efficiency-enhancing and have fostered investments and, at the same time, popular dissatisfaction with the process is extremely high. We show that this line of explanation is supported by stylized facts from surveys in the region. 1We thank Paulina Beato for having initiated this research and the Inter-American Development Bank for its financial support. We thank also seminar participants at University of Edinburgh for useful comments. The usual disclaimer applies. 2University of Toulouse (IDEI) and Institut Universitaire de France. 3University of Edinburgh.