Cash versus digital payments in the public and private sectors: effects on petty versus grand corruption

Abstract Recently, governments around the world have been pushing for greater payment digitalization in an effort to curb corruption and illegal transactions through greater traceability. However, evidence on the effects of these policies has so far been scant. Using data on a large cross-section of countries, this paper investigates the channels through which digitalization affects corruption in the public sector. Our results show that digitization measures (e.g., increasing internet access, reducing the digital divide, and transition to e-government) lower overall corruption, mostly by reducing petty corruption. The same measures do not impact grand corruption. Reliance on cash payments is positively associated with corruption, though we find no effect for government transfers and pension payments in cash. Collectively, these findings caution against the notion that digitalization efforts will be a panacea against corruption.