Introduction

In economies with extensive corruption, a primary public-policy question concerns the role of the public-sector wage. A version of the efficiency-wage hypothesis proposes that higher public-sector wages deter corruption because of high personal losses from apprehension and dismissal from public service or public administration (Kligaard 1988, 1997; Mookherjee 1995; van Rijckeghem and Weder 2001). Higher public-sector wages have also been proposed to reduce corruption by attracting more honest persons into government employment (Bond 2008). A higher public-sector wage does not however ensure honesty when bargaining over the value of a bribe can take place (Mookherjee and Png 1995). Bribery may moreover be endemic to a government bureaucracy, as when promotion in a government bureaucracy requires bribing higher level officials (Kahana and Liu 2010), in which case not honesty determines the individual decision whether to seek and accept bribes, but the requisites of personal career success. Another theoretical model, by Besley and McLaren (1993), shows how different corruption outcomes arise depending on the rule for determination of the wage of a potentially corrupt tax inspector. With the theory overall ambiguous about whether high public-sector wages are an effective policy against corruption, mixed results have also been reported in empirical studies.1 We add to the empirical literature on public-sector wages and corruption by studying the case of China. Our empirical results show that corruption has a U-shaped relation with public-sector wages.2 The relation is robust across empirical specifications in the short and long run and the means of estimation. Our estimates also show that, as a region’s per capita income increases, the effect of a higher public-sector wage in reducing corruption diminishes: at a sufficiently high regional per capita income, a higher regional public-sector wage is associated with increased corruption.