Game Theory and Bribes
This entry was posted on 4/10/2011 5:26 PM and is filed under uncategorized.
Kaushik Basu is a professor of economics at Cornell University. Cornell is located in the quaint, neat and beautiful town of Ithaca, which is about 200 miles (320 km) or 4 hours drive north of New York City in the US. He has recently returned to India, the country of his birth, to advise the government.
Like all emerging markets, India has a problem. Too much corruption. Too many bribes. Professor Basu has a solution. He has suggested that paying bribes should be legal.
His ideas come from one of my favorite disciplines, game theory. The logic goes like this. Right now both the government official, who receives the bribe (in good legal speak the bribee) and the person making the bribe (the bribor?) are punished if the crime is discovered. Since both are equally guilty under the law, the bribor has no incentive to expose the activity.
Professor Basu’s idea is that for so called “facilitation payments”, small payments made to expedite routine business needs like clearing customs or obtaining permits, the bribor’s actions should be legal. In theory once the bribe has been made, the bribor can expose the bribee to prosecution. This threat would act as a legal disincentive to deter the bribee or government official from soliciting the bribe in the first place. Right now, the interests converge. Since both bribor and the bribee face punishment, it is in both their interests to keep quiet.
But will it work? To answer that you have to ask why do people pay bribes anyway? Bribes by definition involve government activities. There has to be a government official. The bribor wants the government official to act, refrain from acting or act in a manner that favors the person making the bribe.
In the case were bribes are paid for purely ministerial functions, making bribe paying legal might help, if we assume that that the government official once exposed would actually be subject to punishment. No doubt this would occur in Ithaca New York, but would it occur in India or another emerging market?
Probably not. Recently according to the Indian newspaper, the Hindu, via WikiLeaks, an American diplomat was shown two chests full of cash that the ruling Congress Party was going to use to bribe opposition MPs at $2.2 million apiece. Although no doubt well aware of the bribes, the squeaky clean Congress party leader, Prime minister Manmohan Singh, denied the allegation.
Again by definition the government official taking the bribe is part of a government. The government or the party in power most likely appointed the official for political reasons. As the former American president, Ronald Reagan, said “the 11th commandment was that thou shalt not criticize a member of your own party.”
So the government in order to protect itself will not have an incentive to prosecute the official receiving the bribe. Instead it will be more likely to persecute the person who exposed the malfeasance, the whistle blower. Which points out the problem neglected by professor Basu, other economists and financial analysts, they assume that their theories will work anywhere regardless of the legal framework.
The real problem with bribes for ministerial functions is that the government has monopoly. For example in many countries for many years the state controlled telephone service. Getting a landline often took many years and many bribes. With the advent of mobile phones, multiple companies offered service and the monopoly disappeared along with the potential for corruption.
The other aspect of bribing government officials has to do with having the government official use his discretionary power in a manner that benefits the person paying the bribe. In this case if paying the bribe was legal, it would make the situation worse.
The person making the bribe is doing so to obtain a competitive advantage like a cheap mobile license. If he exposes the official, then he loses the advantage. So his best move in game theory would not be to expose government official, but rather use the evidence of the bribe to extort further advantages.
One of the main problems with bribery is transparency. Businessmen are not sure who to bribe, how much to bribe and how to ensure that the bribed official actually performs the contracted action, so the market is always inefficient. Decriminalizing the paying of bribes will simply help the bribors enforce the contract through extortion.
The real problem with bribery is paradoxically a problem with law. Many laws have a tendency to distort the economic environment and markets. So the best and most economically efficient method of eliminating corruption is usually simply to eliminate the laws themselves. Reducing the size of government, reducing its monopoly, outsourcing its services, limiting discretion, reducing regulatory interference, diversifying enforcement and above all, increasing transparency, are far better methods to eliminate corruption than decriminalizing an obvious theft.
