Saktinil Roy
October 1st, 2010
AU Research Forum Presentation
1
What does the current literature
tell us?
 Most
work analyzing the causes and
consequences of corruption assume a
principal-agent framework.
 A government official is an agent to the public
entrusted with performing tasks, but its actions
and the specific circumstances are not fully
observed or monitored.
 A dishonest government official either makes
illegitimate claims in return of its service or
engages in illegal deals with private agents
looking to evade the law (e.g. tax evasion or
violation of environmental regulations).
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What does the current literature
tell us? (contd..)

Notice two key elements
 The bureaucrat is “dishonest” and
“opportunist”
 Only two parties interacting –
the government/supervisor and the
bureaucrat or the client and the bureaucrat
3
What does the current literature
tell us? (contd..)

Policy implications
 Monetary incentives to government
bureaucrats – the efficiency wage argument
(Becker and Stigler, 1978; Rose-Ackerman,
1978)
 Increase in economic and political
competition (notably, Shleifer and Vishny,
1993)
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Problems with this approach

Agents can indeed be “dishonest,” and there can
be corruption resulting from imperfect monitoring.

Nonetheless, the assumption of agent dishonesty
for ALL types of corruption to occur is troubling in
face of the twin facts:
 Corruption is widespread in many less
developed countries and also in some advanced
countries
 Real life examples where people are motivated
by non-monetary incentives are at least as
widespread

So, can we safely assume that it is always due to
imperfect monitoring of dishonest agents?
5
Problems with this approach
(contd..)

The assumption of “dishonest” agents is not
always quite consistent with recent findings
that indicate
 agents are attached to the idea of “fairness” (Akerlof
and Shiller, 2009)
 often people are happy to be part of an organization.
So, part of their satisfaction depends on how well
they work to fulfill the goals of the organization or
what others think how well they performed (Akerlof
and Kranton, 2005; Besley and Ghatak, 2005)
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Problems with this approach
(contd..)

Most work also ignores how corruption at the group level
affects corruption at the individual level – an important
criterion.
 In a different strand some work done in this area (Tirole, 1996;
Andvig and Moene, 1990; Cadot 1987; Sah 1988)
 In an yet different strand:
Esteban and Ray (2006) explain how asymmetry of information
between the government and private agents and effective
“lobbying” by powerful groups might lead to wrong selection of
projects.
• Might look like corruption, but actually not.
7
Problems with this approach
(contd..)

Does not incorporate the influences of third
parties from outside the government
 However,
 real world instances suggest that government
officials are quite often under pressure from
private influential parties
 Individuals are, at times, caught by adverse
circumstances (e.g. Basu, 1986, 2000)
 So, can “honest” bureaucrats be
“corruptible”?
This is my point of departure
8
Problems with this approach
(contd..)

Overall, the literature tends to ignore that
 like social practices such as caste, rat race,
and racial discrimination, types of corruption
that exhibit a recurrent pattern are also social
phenomena – the causes and consequences
are pretty much implied by the society’s
institutional structure.
 corrupt incidents are not always acts of
bureaucrats who are “dishonest” by nature
or due to lack of monetary incentives.
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My approach


The literature has taken an extreme stance:
“dishonest” agents engaging in corruption.
I address the issue from the other extreme: “honest”
agents engaging in corruption due to third party
influence?
 So, corruption in the context of triadic relationships
 Triadic relationships in economics: Akerlof (1976), Basu
(1986)
 Cite real world examples
The idea: we get better insights into the many
realistic possibilities where the government is partly
benevolent and bureaucrats are partly honest.
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The Model

Context
 Assistance programs for the rural poor in an LDC –
such as Swarnjayanti Gram Swarozgar Yojana in India
(IRDP until 1999)
 Selection of beneficiaries depending on skills and
background.
 The poor performance of these programs is partly due
to “poor targeting” – often assistance provided to
people who deserve less or nothing.
 According to NABARD: as high as 70 percent in the state
of Andhra Pradesh and 47 percent in the state of Gujrat in
India
 Fenichel and Smith (1992) discuss failure of IRDP in
Zambia due to poor targeting.
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The Model (contd..)
 Bureaucratic corruption is often thought to be responsible for
“poor targeting.”
 However, several accounts on these programs suggest that
power relations in traditional rural societies – particularly as
they pertain to the role of the rural elite – has to do with poor
targeting.
 Succinctly described by the World Bank (World Development
Report, 2000/01): even if sufficient fiscal autonomy is vested
to a local government, political manipulation and rent seeking
by local elites (quite often landlords) might turn that privilege
against the poor.
Question:
Is this is possible as an equilibrium outcome?
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The Model (contd..)

I illustrate this point with a simple model
 Three agents:
 The government official (G):
 Honest – gets zero utility from bribe
 Positive utility from reputation of an able bureaucrat
 A potential beneficiary (L)
 A member of the rural elite (Y) who buys labor
from L
 Based on documented information, G
determines how much assistance L and other
beneficiaries should receive.
 It ranks the potential beneficiaries per the
assistance amounts they should receive based on
skills set, education and other important criteria.
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The Model (contd..)



Unlimited surplus labor – the wage rate is fixed at the
subsistence level.
Under normal conditions, Y maximizes utility by choosing
the amount of work to be bought from L – but L should
receive at least its reservation utility.
 Gives a take-it-or-leave-it offer to L
We assume, due to search costs, L receives a bit higher
than the reservation utility.
Question:
Can Y intervene in the assistance provision
process and get a larger amount of assistance
for L, part of which it enjoys itself?
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The Model (contd..)

The sequence of moves
Y decides whether or not to intervene in the
assistance provision process
 G offers an amount of assistance to L
 L accepts or rejects G’s offer
 Y decides whether or not to buy labor from L – if
it decides to buy then it gives a take-it-or-leave-it
offer .
 L accepts or rejects Y’s offer
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The Fair Outcomes
Full information: Y does not intervene, L
receives the legitimate amount of
assistance, and Y buys labor from L.
 Asymmetry of information about L’s
eligibility: Y does not intervene, G provides
L with an amount of assistance based on a
probability distribution, and Y buys labor
from L.
Note: these can be realized as parts of
subgame perfect Nash equilibria when Y
adopts the strategy of “no interference.”

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Corruption under Influence and
Coercion

Corruption occurs when G deviates from the public
mission by providing a greater amount of assistance
to L than what it deserves.

Asymmetry of Information:
 G seeks Y’s help to learn more about L’s eligibility
 Y deliberately overstates L’s eligibility
 G believes partly and alters the probability distribution about
L’s eligibility for all possible amounts of assistance.
 As a result, G might provide L with a greater amount of
assistance than what it deserves
 Part of the additional illegitimate amount is extracted by Y via
the offer of employment
 L accepts this arrangement as long as it is better off with the
employment from Y than with the whole assistance amount
but no employment.
17
Corruption under Influence and
Coercion (contd..)

Overt threat under full information:
 Y can put forward an overt threat of harassment to G and
ask to provide an illegitimate, greater amount of
assistance to L.
 It will do so if the cost involved in harassing Y is less than
the extra benefit from part of the additional illegitimate
assistance amount that it will extract from L.
 Actually, since Y is a man of influence, there can be zero cost, as
any prior cost incurred should be treated as a “sunk cost.”
 G will provide a greater illegitimate amount of assistance to
L if the loss of utility due to harassment is greater than the
loss of utility due to bad reputation of a corrupt bureaucrat
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Corruption under Influence and
Coercion (contd..)

Covert threat under full information
 Y can adopt and announce the following strategy.
“G should provide L with a greater amount of
assistance than what it deserves. If G does not
obey me and L still accepts G’s offer then I will not
hire L.”
Note: there is no direct threat to G, the threat is
only to L. But it amounts to an indirect threat to G.
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OUT
Nash Equilibrium 1: (IN, DIS, AC, B)
(900, 100, 8)
Y
Nash Equilibrium 2: (IN, DIS, AC, N)
IN
OUT: no intervention
IN: asks to change L’s rank
OB: obey
DIS: disobey
AC: accept
RE: reject
B: buy
N: don’t buy
Nash Equilibrium 3: (IN, DIS, RE, B)
G
OB
DIS
L
AC
L
RE
Y
B
AC
Y
N
B
RE
Y
N
B
Y
N
B
N
Y
1000
900
900
900
900
900
900
900
G
L
90
10
90
9
70
7
70
5
100
8
100
6
80
7
80
5
Fig. 1: Case 3: Extensive Form Representation
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Corruption under Influence and
Coercion (contd..)

For a specified amount the above strategy is
“credible” and will lead to a subgame perfect
Nash equilibrium if the following hold.
 The loss of utility due to bad reputation of a corrupt
bureaucrat is less than the loss of utility due to bad
reputation resulting from part failure of the assistance
program.
 L is better-off with an employment from Y than with the
legitimate assistance amount and no employment from
Y.
 Y can find a substitute for L without any additional cost
– which is possible under unlimited surplus labor.
 The off-the-equilibrium path along which the threat will
be carried out can be realized as a Nash equilibrium.
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Corruption under Influence and
Coercion (contd..)
Note that in ALL three cases G will be
labeled as a “corrupt” bureaucrat and
suffer a loss of reputation, although it
does NOT accept any bribe.
Possible similar incidents in other
contexts, such as tax collection, granting
business license, pollution control, or
arms purchase contracts – even in
advanced countries
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Policy Implications
 Increased monetary incentives to bureaucrats is a solution that is
incomplete at best – could even misdirect economy’s resources.
 Increased economic and political competition in the public sphere
as well as in private sphere.
 One way of achieving the above goal is to provide greater
entitlement to the vulnerable section of the society. But, note that
the status quo of concentration of power and wealth is an
impediment to realizing this.
 Two way causality -- a vicious circle in effect.
 Greater law enforcement, better transparency of
governmental procedures, greater participation of
people in the decision making process (devolution of
power)
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