Does the Internet Reduce Corruption? Evidence from U.S. States and Across Countries. Working Paper

We test the hypothesis that the Internet is a useful technology for controlling corruption. In order to do so, we develop a novel identification strategy for Internet diffusion. Power disruptions damage digital equipment, which increases the user cost of IT capital, and thus lowers the speed of Internet diffusion. A natural phenomenon causing power disruptions is lightning activity, which makes lightning a viable instru-ment for Internet diffusion. Using ground-based lightning detection censors as well as global satellite data, we construct lightning density data for the contiguous U.S. states and a large cross section of countries. Empirically, lightning density is a strong instru-ment for Internet diffusion and our IV estimates suggest that the emergence of the Internet has served to reduce the extent of corruption across U.S. states and across the world. JEL Classification codes: K4, O1, H0 Corruption is commonly perceived to be a major stumbling block on the road to prosperity. Aside from retarding growth (Mauro 1995), corruption entails fiscal leakage, which reduces the ability of poor countries to supply essential public services such as schooling and health care (Reinikka and Svensson 2004