Economics of Corruption--Posner

The word "corruption" is extraordinarily vague, and, in part for that reason, ubiquitous. Charges of corruption are everywhere. Notably, economically booming China is nevertheless said to be seething because of the corruption of local officials, and Chicago's mayor is being questioned by federal investigators about corruption in his otherwise very successful administration. The problem with the word is twofold. First, identical practices sometimes are "corruption," sometimes not. Second, despite the pejorative connotations of the word, the normative signficance of corruption is not always clear. Fifty years ago it was common in nightclubs in New York (maybe it still is--I haven’t been in a nightclub in New York in 48 years!) to have to give the headwaiter a tip in order to get a table, even if there were many empty tables. This was a form of bribery, but accepted as proper. Management knew about the practice and condoned it. The headwaiters were doubtless paid less than if they had been forbidden to accept these bribes, but that of course was not a clear gain to the nightclub; the nightclub presumably charged customers less because the full cost of the entertainment to them was greater by the amount of the bribe. So far, a wash; but if the bribes induced the headwaiter to be friendlier and more helpful to the clientele, the nightclub was better off. Likewise with tips for waiters and waitresses, despite the possibility that a generous tipper will get better service at the expense of other customers, to the harm of the latter. So what is wrong with bribing public officials to obtain public services, provided the practice is known and wages are adjusted accordingly? In effect, bribes shift the financing of public services from taxes to a combination of taxes and fees for service. By injecting a market element into public services, bribes can actually improve efficiency when used to get around rigid or inefficient rules. To recur to the 1950s in New York, municipal ordinances forbade contractors doing construction work to obstruct sidewalks and streets, but often it was impossible to do such work without creating at least minor obstruction and so contractors bribed police to look the other way. The net effect on social welfare was probably positive. But there are several problems that together make bribery of public officials on balance inefficient--and thus "corrupt" in an unequivocally bad sense. First, not all rules are inefficient, and bribes are bad from an economic standpoint when they subvert an efficient rule, as when a building inspector accepts a bribe to overlook a serious fire hazard. Second, without competition among bribe takers (in the New York nightclubs this was secured by the competition among the nightclubs themselves, which limited the amount of bribes that management permitted its headwaiters to receive), the bribe will exceed the cost of the public service being purchased with it, distorting the allocation of resources (though the higher taxes that would be required to compensate public employees who did not have bribe income would also have distortionary effects--all feasible taxes do). Third, delay and uncertainty are created when multiple officials must be bribed. And fourth, a bribery culture reduces pressure to repeal inefficient laws--in fact, it creates in public officials a vested interest in preserving such laws. In that respect, it is a protection racket. Since public corruption seems on balance inefficient, the question arises why it is so common. The answer is that corruption flourishes where the economy is heavily regulated but the legal framework is weak. The more heavily regulated the economy, the more irksome restrictions there are that will create a demand for methods of avoiding compliance with them, and bribery of the enforcers of the restrictions is one such method. The weaker the legal framework, the more difficult it will be for the government to prevent bribery, a classic "victimless" crime because bribery is a voluntary transaction; and it requires a sophisticated legal machinery to detect and punish such crimes. There is another and subtler effect of the legal framework. Unless there is an effective machinery for the impartial enforcement of contracts, people will be reluctant to do business with strangers. Economic activity will tend rather to be organized on the basis of familial and other personal relationships. In such a culture it will seem perfectly natural for public officials to exhibit favoritism toward friends and relatives, including persons who purchase their friendship with a generous bribe. Nepotism, clientalism, and bribery become substitutes for contract when the enforcement of contracts is undependable. In contrast, corruption should be rare in a free-market system with courts that enforce contracts honestly and dependably. So how to explain public corruption in America's big cities today? It seems less common than a half century ago, and perhaps that is because there is somewhat less economic regulation and also a somewhat greater professionalism in civil services, police, and the judiciary. Another factor is that most big cities have Democratic mayors, and the Presidency has been in Republican hands for almost two-thirds of the period since 1969; Republican attorneys-general are more likely to investigate and prosecute public corruption in Democratic-controlled cities than Democratic attorneys-general are. Becker discusses other causes of the decline in U.S. corruption in his comment. The persistence of corruption in some of our big cities may reflect the presence of immigrant communities in these cities, in which barter and other forms of reciprocal dealing based on (and constructing) relations of trust, extended family relationships, clan ties, and the like continue to organize significant economic activity and make it natural to think of public officials as "selling" public services to their friends and relatives. The problem of corruption underscores the importance of the legal framework to economic development. An honest, incorruptible police, criminal law enforcement machinery, and judiciary can increase economic efficiency by greatly reducing the amount of corruption (as well as in other ways), though it is equally important to have a commitment to free markets and a workable legislative and regulatory machinery to prevent economic activity from becoming encrusted with inefficient restrictions.

Comments

[Thomas]

Palooka writes, "The tip you paid for a good table is simply not a bribe, except perhaps in the most technical sense..."

Palooka's got a point. Surely kickbacks and tipping aren't the same thing, not in the same ballpark, not the same sport. After all, tipping is a widespread and open custom.

But in some countries, you're expected to "tip" the man who stamps your papers, (In Russia, a bottle of whiskey seems to be the standard). It's widespread and understood. The analytical distinction is hard to pinpoint.

Maybe the "technicalities" can help us fill in our definition a little. Maybe inefficiencies of corruption exist whenever undisclosed costs are distributed unevenly to those receiving a certain service.

Because of its voluntary nature, tipping amounts to a tax on those with a modicum of common decency. Obvious view. But more importantly, because of the triage situations that inevitably accompany most services, it also taxes certain classes of people (like the modestly dressed) with bad service.

The guesswork involved in determining good tippers prohibits some classes of individuals from competing for good service. If these individuals simply become bad tippers, they cement the prejudices justifying the bad service in the waiter's mind. Should they lapse into generosity and tip well, regardless of service, they reward bad service. If bad service is rewarded, good service becomes uncompetitive, which makes it harder for the industry to continually select for better servers, which means everyone gets worse service.

Is it corruption like in Moscow? Certainly not. But it's still annoying.

[David]

There is a difference between "tipping" a waiter after the fact and having to slip someone a wad of cash just to get a table.

In commercial settings, at least, the difference between "bribery" and an addition to the purchase price is whether the transaction is out in the open. Suppose that a bouncer at a night club requires a $20 payment to let people inside. If management knows about this and approves, it is a cover charge. Also, management presumably takes the bulk of the money and pays the bouncer a salary (and perhaps a commission for attracting customers). On the other hand, if management does not know, and customers are not "officially" informed of the cover charge, it is bribery. The bouncer is extorting customers to line his own pockets and is charging for a service that the club hired him to provide for free. Both the customers and the club are victims of the bribery scheme. Also, I presume that the club reports income from cover charges to the IRS, while bouncers demanding handouts do not report their "income."

[Ken]

In reading the articles and most of the comments, I've not seen any reference to morality or honesty. While economic analysis apparently doesn't favor such considerations, its simply silly to say that bribery occurs (simply) because of government regulation and weak enforcement. I would expect plenty of honest officials to refuse bribes even were it common around them and even if the government doesn't prosecute properly. Serpico in NYC and the Operation Graylord in Chicago would be examples of people with scruples who don't give in to the influence of others.

[Palooka]

"On the other hand, if management does not know, and customers are not "officially" informed of the cover charge, it is bribery."

Agreed, as is consistent with my comments. He is violating his duty and obligation as an employee. He is using his position to advance his own interests, while neglecting his role as an employee. But, remember, Posner called this bribery even when the manager knew and condoned this behavior, as was the case when he frequented those establishments. Even tipping would constitute "bribery" using Posner's loose criteria.

Maybe I am wrong, but it seems corruption is really just another manifestation of the principal-agent problem. I think most corruption amounts to a violation of a fiduciary duty. Where a "bribe" is merely an additional price paid by the consumer, with full knowledge of the proprietor, that cannot seriously be viewed as either a bribe or a symptom of corruption. Posner's inclusion of this scenario has muddied the waters unnecessarily.

[ben]

Ken

its simply silly to say that bribery occurs (simply) because of government regulation and weak enforcement. I would expect plenty of honest officials to refuse bribes even were it common around them and even if the government doesn't prosecute properly.

It depends how you define honesty. If you define honesty as "not corrupt" then nothing is explained because honesty will vary in exact (inverse) proportion to corruption.

Presumably you mean a sort of intrinsic honesty, an unwillingness to break laws regardless of incentives to do so. But how is this distinguishable in practice from the first definition?

Isn't the way to think about honesty as a second order function of the things Posner and Becker do raise: income, culture, enforcement of rules on officials, etc. While there may be individuals that are genuinely indifferent to incentives to break the law, they might either be insufficiently frequent to explain variation in the prevalence of corruption between countries, or indistinguishable from corruptible individuals who face incentives to be honest.

[ken]

Is the meaning of "honesty" as hard to define as "is" was for President Clinton? The position was or implied in the original article that everybody is dishonest if it works to their financial benefit if law enforcement is weak and/or there is a lot of regulation. If a person is moral, he won't break the law regardless of the financial benefit or the lack of detection.

It's a circular argument to say that that's the flip side of corruption.

America has avoided much of the corruption of the rest of the world largely because we are more morally/religiously based in our value systems.

[Wes]

Is the meaning of "honesty" as hard to define as "is" was for President Clinton?Given that there are still people who think Bush is "honest" even when he claims that if the USA withdraws from Iraq then Bin Laden will become the ruler of Iraq, the answer would be "yes".America has avoided much of the corruption of the rest of the world largely because we are more morally/religiously based in our value systems.It's too bad the Taliban got overthrown because with all their morality and religion there wasn't even the tiniest bit of corruption in Afghanistan back when they were in power.

[R]

"America has avoided much of the corruption of the rest of the world largely because we are more morally/religiously based in our value systems."

Ken, I suspect (hope) is having a bit of fun with us.

[Nessie]

The problem with "good corruption" is that encourages the very bad laws that foster such corruption.

For example, if police are bribed to overlook "bad" laws, the police will have greater incentive to enforce bad laws in the absence of bribery. On the legislative front, if legislators are bribed to alter bad laws, then they will have greater incentive to propose bad laws. We often see this happening.

[FN]

Ken it seems must be drinking the same holy water as Pat Robertson.

That said, I think that any discussion of corruption begins with the political and economic interests behind "law" and "institutions". Who forms it, who shapes it should be Posner and Becker's starting point not only in focusing on what is and what isn't "corruption" but also in making a more credible value judgement on the scale of it in any system.

I say this because in a country such as the USA where the law and institutions by and large are formed for and shaped by private capital, examining corruption in terms of bribes to waiters or police misses a large part of the picture.

Corruption in America should also be studied from the viewpoint of corporate donations, lobbying, hiring of those with ties to government and other corporate acts which bend the law and public officials to work in the interests of a few.

After all, those particular forms of corruption are responsible for huge corporate tax breaks, incentives, anti-competitive trade policies and of course legislation that heavily favor business over consumers.

[TheWinfieldEffect]

KEN: "In reading the articles and most of the comments, I've not seen any reference to morality or honesty."

What do you think "personal integrity" means?

[ben]

Ken

The position was or implied in the original article that everybody is dishonest if it works to their financial benefit if law enforcement is weak and/or there is a lot of regulation.

I don't think that's right. The observed variation in corruption across countries could still occur even if, say, half the population in every country was incorruptible. Posner and Becker's argument still holds for the remaining 50%.

[Thomas]

Can Posner's suspicions about the influence of immigrant communities on rates of corruption be correct?

"The persistence of corruption in some of our big cities may reflect the presence of immigrant communities in these cities, in which barter and other forms of reciprocal dealing based on (and constructing) relations of trust, extended family relationships, clan ties, and the like continue to organize significant economic activity..."

If bribery is repeatedly selected by some markets, it suggests bribery may provide Pareto improvement, that it is rational (as the bulk of Posner's post seems to argue). Could bribery really be more rational for certain cultural groups but not for others?

This smacks of a sort of pluralism I suspected Posner's typical intellectual rigor would bar.

Perhaps a slightly more robust analysis would mention that the value of certain services are simply greater to new arrivals, thus changing the risk/benefit analysis of bribery. Police protection against xenophobic threats, securing access to contracting opportunities to break up established contracting circles...

Here's the hard test: If my suspicions are correct, then even Americans abroad, despite the fact that they lack "clan ties [which] organize significant economic activity," should demonstrate higher participation in bribery than locals. Is there any good data on this, or is the discreet nature of corruption too much an obstacle here?

[ken]

I didn't see any reference to "personal integrity", either.

I would take personal integrity to mean being honest, moral, acting with an acute interest in doing what is right according to God's will, or the Golden Rule or perhaps the Categorical Imperative.

If a discussion of corruption is to leave out reference to morality, then it can be an enlightening discussion, but incomplete. This is the main reason for my first comment.

[Corey]

I'm going to have to agree with Ken here, it
is remarkable to see the degree to which this discussion has excluded and even actively resisted considering "honesty" or the moral costs of corruption. For example:

"Ken it seems must be drinking the same holy water as Pat Robertson."

And no, "personal integrity" is not the same thing as "honesty." The latter implies a relation between persons, while the former is inward looking. I submit that it is easier to be corrupt under a value of integrity to the self than under one of honesty. Unless you are defining "personal integrity" more broadly than typical pundit usage. (as code for rational self-interest)

Several weeks ago a friend of mine found a quote in De Tocqueville that he thought particularily relevant to this blog. It is interesting to see a condemnation of technocrats from 160 years ago:

"Not far from this class is another party, whose object is to materialize mankind, to hit upon what is expedient without heeding what is just, to acquire knowledge without faith, and prosperity apart from virtue; assuming the title of the champions of modern civilization, and placing themselves in a station which they usurp with insolence, and from which they are driven by their own unworthiness."

[Corey]

Of course Posner could object (as he sometimes does) that he stated from the very title of the post that this would be an "economic" discussion of corruption.

However, my criticism is directed at that initial choice to speak only in those terms. (And the subsequent defense of that standpoint by commenters)

[Wes]

...to acquire knowledge without faith...That seems a lot like "honesty": a willingness to set aside what one would like to believe (or what is in one's best interest to believe) in deference to what is actually observed (and to what remains unknown).

[Wes]

Of course, I agree that the discussion was framed too narrowly.

[David]

On the "moral cost" of corruption:

A problem with "economic analysis" of any subject, including law, is that it is amoral. Economic theory is basically a form of utilitarianism, which sees the end result as the only "moral" consideration. So Posner is concerned only about the effect of corruption on society as a whole, not what it does to the "moral sense" of individuals.

In that way, L & E is a more radical philosophy than even Holmes' "bad man" view of the law. Holmes acknowledged that the law can contribute greatly to morality; he argued only that, to understand the law fully, one must study it through a neutral lens. L & E goes farther and says that there is no morality other than utility, which it defines - rightly or wrongly - as wealth maximization. In my opinion, such analysis can have useful insights from the standpoint of efficiency, but it is deeply flawed as a first principle.

[ben]

"Not far from this class is another party, whose object is to materialize mankind, to hit upon what is expedient without heeding what is just, to acquire knowledge without faith, and prosperity apart from virtue; assuming the title of the champions of modern civilization, and placing themselves in a station which they usurp with insolence, and from which they are driven by their own unworthiness."

I'm no English professor, but isn't this quote suggesting a trade-off between prosperity and virtue?

How does this fit the observation that developing countries suffer higher corruption?

[Palooka]

Corey, there are two kinds of morality. Those moral considerations which exist independent of efficiency, and those which exist because of it.

Corruption seems to fall in the latter category, so discussing it in purely economic terms is quite appropriate.

[David]

Becker's and Posner's apostrophes show up as three unusual characters on my screen, and looking at the page source, I see that they *are* three elaborately coded unusual characters.
It seems the page is encoded as UTF-8. If you change your browser to this setting, they become apostrophes again. It's strange that browsers aren't auto-detecting this.

[asian]

i just hope that becker will repeat the same story of tsunami in asia for the new orleans incident. i'll be very pissed if he say something special to new orleans. it will be okay in the long run, right, becker?

[GaryGech]

I think that Morton Horwitz made many good points that are far more reasonable than the Law and Economics approach to corruption.

From my memory, he pointed to Learned Hand's jurisprudence, and he stated very clearly that we cannot use this type of economic analysis to consider how to trade off on societal ills.

The approach we use for torts is fundamentally different than the approach we use for criminal law.

First off, corrupt behavior reflects deep moral conflicts and not simply trade offs. Second, there is not a recognized market place for corruption.

One reason that people are less corrupt today is not economics but rather religious. People who have faith in a higher power tend to act with sense of self-reservation. Don't take my word for it. Parole boards are very clear on the fact that religious participation works to make people better citizens.

Economics is important but does not always make people better citizens. Sometimes people are just plain greedy and make up all sorts of excuses to take more than their fair share.

I guess the bottom line is personal. There are a lot of really good people in the world. What I have seen is that these people are motivated by doing a good job, not simply by money.

The real key to eliminating corruption is not law and economics but law and society. The law society movement suffered because it was overwhelmingly liberal and wanted to paint everyone was poor as a victim.

But the proper movement for law and society would have been the Grapes of Wrath approach. What I mean by that is pure FDRism. A person must accept their place in life, for better or for worse, at any particular moment. Then, a person must commit themselves to improving. Per those things we cannot change, we must seek to understand them.

FDR was very interesting. He suffered greatly from his polio but basically got over it psycologically. Most people on earth will never suffer as greatly as FDR did during the majority of their life. This research has been done, and the top forms of suffering has been listed as major health disability, namely dementia, blindness, quadriplegia, and paraplegia.

Being poor does not give a person an excuse to steal any more than being blind gives a person an excuse to be angry with people.

In fact, the blind are almost uniformly kind and appeciative, and it has been my experience that people with paraplegia simply want help and are very thankful.

I would conclude that what makes people corrupt is a personal choice. People begin down a certian rode and continue that behavior.

It would be interesting to see an analysis of Bill Clinton on the Y axis and various interns graphed on the X axis. Then we could draw a curve and declare the marginal utility of corruption.

But in fact, this analysis is not as useful as identifying wrong behavior. Bill Clinton was a nice president, but unfortunately corrupt. His highest expression of corruption related to Marberry v. Madison and his abuse of the pardon power.

I found this a very interesting area of corruption, because it had been predicted two hundred years earlier.

What is interesting about Marberry, was that Marshall stated that the Pardon power was a political right, meaning the president may abuse it.

To my knowledge, Clinton abused the pardon power on his last day of office in the grand style. How one achieves such a grand style is beyond me, but he did.

Gary

[Thomas]

Each week this vaguely familiar criticism emerges, attempting to undermine the entire discussion, whatever the topic, by accusing the economic analysis of amorality.

It's a strange notion, that any discussion is incomplete without an accompanying discussion of ethics. What conception of fair time priveleges ethics above all other topics? Is Stephen Hawking similarly criticized for his physics-centered amoral worldview? Is Roger Ebert plagued by letters demanding more moral discussions in his reviews?