A few years ago, Scott Guggenheim, a social development sector coordinator at the World Bank, hiked to a village in North Sumatra, Indonesia, to see its new water system. But he couldn’t find the apparatus. Eventually, he located its PVC pipes: The village head had fashioned them into lawn furniture, which he was selling in the nearby market town.

“Corruption is rampant in Indonesia, and it acts like a tax on development projects and business,” attests Benjamin A. Olken, an economist and...

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