Did Iraq Cheat the United Nations? Underpricing, Bribes, and the Oil for Food Program

From 1997 through 2003, the UN Oil for Food Program allowed Iraq to export oil for humanitarian supplies. We hypothesize that Iraq deliberately set the price of its oil below market prices to solicit bribes from oil buyers. By comparing the price gap between Iraqi oil and its close substitutes during the Program to the gap prior to the Program, we find evidence of significant underpricing. Our central estimate suggests that Iraq collected $1.3 billion in bribes from underpricing its oil, or 2 percent of oil revenues. Underpricing is higher during periods of high volatility in oil markets–when detection is more difficult–but declines after the UN limited Iraq’s ability to set the price of its oil. We thank Steven Davis, Stefano Della Vigna, Ray Fisman, Richard Gilbert, John Fawcett, Frank Hydoski, Alan Krueger, Chad Jones, Maurice Lorenz, Ted Miguel, Mary Jane Schirber, and three referees for helpful comments. We are grateful to Eric Chaney, Emily Conover, Daniel Hartley, Bing-ru Teh, and Matt Wiswall for superb research assistance. Hsieh thanks the Alfred P. Sloan Foundation for financial support. Hsieh can be reached at [email protected]. Moretti can be reached at [email protected].