University of Mannheim
Faculty of Social Sciences
Chair for Political Science III
Hauptseminar “Rational Choice Theory: Voters, Parties and Governments“
Prof. Dr. Hanna Bäck
May 4th, 2009
Rational Choice and Anti­Corruption­
Strategies
Rico Grimm
Riedfeldstr.30
68169 Mannheim
[email protected]
0177/4064929
B.A. Politikwissenschaft
4. Fachsemester
Matrikelnummer: 1119786
Abstract
This paper aims to close the gap between Rational Choice Theories of corruption and respective theories of anti­corruption­strategies. I adapt Anthony Downs' basic set of assumptions to the phenomenon of corruption and therefore focus on a micro­level­approach. Furthermore, I analyse the utility­functions of a corrupt agent and a corrupting client ­ and how a principal with a preference for corruption fighting should act in order to change these three factors in such a way that the level of corruption decreases. As a result I propose that a principal should raise the payment of the agent on the one hand and on the other hand share the monitoring of the agent with the public by increasing the transparency of the bureaucracy.
Tags: Rational Choice, principal­agent, corruption, bureaucracy, corruption fighting strategies
Table of Content
1 Introduction....................................................................................................
3
2 Rational Choice Theory
2.1 Downs' Concept of Rationality....................................................................
4
2.2 Actors Decisions: A Cost­Benefit­Analysis.................................................
7
2.3 The Principal­Agent­Model.........................................................................
8
3 The phenomenon of Corruption
3.1 The Definition of Corruption.......................................................................
10
3.2 The Impact of Corruption............................................................................
12
3.3 The Roots of Corruption..............................................................................
13
4 Applying Rational­Choice­Theory to Corruption
4.1 The Basic Assumptions reviewed................................................................
15
4.2 Analysis of Corruption.
4.2.1 The Principal­Agent­Client­Constellation................................................
17
4.2.1.1 Typology of the involved Costs and Benefits.........................................
19
5 Strategies to fight Corruption
5.1 Increasing Costs, Decreasing Benefits of Corruption..................................
20 5.2 Altering the Probability................................................................................
22
6 Critique ..........................................................................................................
24
7 Conclusion ......................................................................................................
25
References............................................................................................................
26
Asseveration.........................................................................................................
29
1 Introduction
It has been more then 50 years ago that Anthony Downs published his widely respected and acclaimed book An Economic Theory of Democracy which proposed a new, economic look on political action. His Rational Choice approach fostered plenty of new insights in the following years, especially in the areas of voting, parties and governments. Nevertheless, it could not be applied to all phenomenons of politics straight away. In particular the paradox of participation left many scholars startled.
But it is not just the rather classical fields of politics, such as voting, where Rational Choice theory delivers good insights. With the rise of corruption research, especially with the introduction of the Transparency International Corruption Perception Index many theories have been applied to describe the phenomenon of corruption. The most promising model to describe corruption on the individual, on the actor­to­actor level is the economic model developed by Johann Graf Lambsdorff and Susan Rose­Ackerman. Moreover the related principal­agent­model helped to understand corrupt exchanges and relationships. But until now there is no theoretical approach in this school of thought that accounts for the need to fight corruption. This paper aims to close the gap between understanding and fighting corruption by applying Rational Choice Theory, as presented by Anthony Downs, in general and the principal­agent­
model in detail to the problem of corruption in order to deduct corruption fighting methods that can be part of a “big push” (Acconcia/Cantabene 2008), a holistic approach that tackles the roots of corruption on all levels. To state it in a more methodological way: What is the highest­ranking­
alternative if a principal wants to fight corruption within his own bureaucratic unit? I propose a model in which I introduce a fourth actor, the public, as a means of the principal to circumvent the classical agency­problem that holds especially true in the case of corruption. The principal can share the monitoring costs of the agent with the public because they have the same preferences.
Due to two reasons this task is a worthwhile endeavour: It helps to test the possibilities of Rational Choice Theory in mainly uncharted waters and it widens our understanding of corruption fighting, a field that was so far mainly advanced through practical work rather then theoretical deliberations. Thus the aim of this paper is normative. I assume that corruption is bad and needs to be fought against. Rational Choice Theory shall serve as a starting ground for 3
devising specific anti­corruption­measures.
Chapter 2 of this paper describes Rational Choice Theory, presents the main assumptions, a typology of the cost­benefit analysis and the principal­agent­model. Chapter 3 shortly shows, how corruption can be defined, why corruption is such a severe problem for the institutional, political and economic stability of a country and where it stems from. Whereas chapter 4 applies the theoretical framework to the special case of corruption, introduces typical cost­benefit­
calculations of the respective actors and states a corruption­differential similar to the voting differential presented by Downs. Chapter 5 finally tries to give an answer to the mentioned question above by analysing step by step how a principal could alter the utility­functions of the agent and the client. 2 Rational Choice Theory
2.1 Downs' Concept of Rationality
Rational Choice Theory as described by Anthony Downs is based on a set of connected assumptions. All in all one can count twelve major assumptions that Downs makes about human behaviour. They are all based on a concept of Rationality that “is never applied to an agents ends, but only to his means” (Downs 1957, 5). But the most fundamental assumption Downs makes in his study deals with the basic set­up of the human mind.
He assumes, following prior economic models of human behaviour, that “concious rationality prevails” (Downs 1957, 4) and thereby builds a comprehensible pattern of behaviour. Thus assumption one can be stated as follows: 1. Human behaviour is “reasonably directed toward the achievement of concious goals” (Downs 1957, 4)
Hence an actor is goal­seeking.
Further he describes rationality as some sort of efficiency, analogous to the so called “Economic Principle” where a entrepreneur or a company always tries to maximize the output for a given input or vice versa. Thus assumption two can be stated as follows: 2. A rational man “uses the least possible input of scarce resources per unit of valued 4
output” (Downs 1957, 5).
Hence an actor is a cost­minimizer and a benefit­maximizer. The Rational Choice perspective does not focus on or questions the particular reasons an actor has to behave in a certain way, but his reasoning. It tries to model 'processes of action'. Downs proliferates a whole set of follow­up assumptions that further narrow down his concept of rationality : 3. An actor can always make a decision when he has got two alternatives to choose from.
4. An actor can rank all alternatives in such a way that each is either superior, inferior or indifferent to the others.
5. This rank­order is transitive.
6. The actor always chooses the highest­ranking alternative.
7. The actor would always choose the highest­ranking alternative, if the set of alternatives does not change. Following these assumptions an actor can assign utilities to every alternative.
In order to circumvent the tautological conclusion that an actors “returns must have outweighed his costs in his eyes or he would have not undertaken it” (Downs 1957, 6) Downs claims his concept of rationality to be useful only in respect to political and economic rationality: “Nevertheless in our model [...] a behaviour is considered irrational [when] it deploys a political device for a nonpolitical purpose” (Downs 1957, 7). Completely aware of the short­sightedness of this understanding of human behaviour Anthony Downs justifies his reasoning with a mere methodological argument: “We must assume men orient their behaviour chiefly towards [economic and political welfare]; otherwise all analysis of either economics or politics turns into a mere adjunct of primary­group sociology” (Downs 1957, 8). He argues further that all these primary­groups would counterbalance each others peculiarities and goals and end up influenced by economic and political goals rather then social, cultural or biological ones. In consequence, Downs tries to ground the validity of his deductive, individualistic model on empirical, group­
sociological points. Nevertheless assumption eight according to Downs can be stated as follows: 8. An actor can only behave rational as explained in assumption 1­7 within the borders of the economic and political sphere.
5
When this actor calculates the costs and benefits of a certain action, due to his incomplete and incorrect information he can not foresee the future behaviour or even the detailed calculations of other actors: 9. He faces a certain degree of uncertainty.
Hence an actor needs to allow for probability in his cost­benefit­calculations.
But the Downs'ian actor has difficulties to calculate properly if he faces massive, seemingly irrational behaviour by other actors. If chaos rules a group of actors and none of them, except the Downs'ian actor, is apparently behaving rational to attain a political or economic goal he faces two alternatives: To become irrational himself or to try to discern the underlying patterns of the seemingly irrational behaviour of the other actors (regarding this point see also assumption nine) This however is only possible if he can bear the costs of doing so but moreover if there is any kind of rational pattern. Thus assumption ten can be stated as follows: 10. A rational actor “requires a predictable social order” (Downs 1957, 11).
Up to now the Downs'ian political or economical rational actor is a goal­seeking cost­minimizer and benefit­maximizer who requires a predictable social order and can assign different utilities to a number of alternatives but can not be sure of them because he faces a certain degree of uncertainty. This rational actor is not more than an intelligent tool because he is missing an essential goal to seek, apart from the instrumental goals of cost­minimizing and benefit­
maximizing. Therefore Downs, concious of this gap, assumes that the actor is selfish. He bases that assumption on mere empirical descriptions of human behaviour of Adam Smith and John C. Calhoun. Thus assumption eleven can be stated as follows:
11. A rational actors seeks mainly selfish goals.
Hence he is egoistic.
These eleven explicitly stated assumptions do implicitly exclude the existence of altruism in its strict sense. Nevertheless, if an actor seeks mainly selfish goals, he can not seek mainly altruistic goals at the same time. It is a contradiction. Still these assumptions do not exclude per se the existence of actions for the greater good which are: Actions that aim at fulfilling an individual desire of the actor but at the same time, willingly or not, foster advantages for other actors or a group of actors too. This leads to assumption twelve: 6
12. Rather than being an end in its own right, actions for the greater good are an externality of goal­seeking behaviour.
The important question following these assumption is how do actors behave in a certain situation and not why; ultimately to unspecified is the term 'selfish' to give a convincing set of reasons. But by doing so, the scholar trades conceptual scope for methodological precision. Even though these assumption are short of so many seemingly important components and were criticized quite harshly by scholars from the whole spectrum of social science (e.g. Green/Shapiro 1994), they do enable scientists to develop models that can be used to describe human action quite precisely, not only with words but with formulas too as the next chapter will show.
2.2 Actors Decisions: A Cost­Benefit­Analysis
I already mentioned that an actors decision can be modelled via a cost­benefit­approach. The simple assumption underlying this deliberation is that every action charges the actor with a certain amount of costs, may they be factual such as money or non­factual such as power and gives him at the same time a certain amount of benefits. We can, according Downs, denote these as following: Costs for an action x: C ∈ℝ=C x
Benefits for an action x: B∈ℝ=B x
However when Actor A calculates the costs and benefits he can not be perfectly sure that these actually occur. For instance he could decide to buy strawberry­milk at the corner shop. If an elephant is blocking the pavement now, A needs to dodge to the street and thus spend more time and walking power than estimated. The same holds true for the benefits: The shop could have run out of strawberry­milk because the elephant could had embroiled the strawberry­milk­delivery­
truck in an accident and thus decreased the benefits of A. Therefore A has to include a term of probability into his calculation. The probability denotes as following: x
Probability for cost or benefits of action x: P∈ℝ {0P1}:=PC
, B
Riker and Ordeshook developed one classical way in political science to calculate the utility of Actor A's decision, based on a voting calculus Downs had proliferated (Riker/Ordeshook 1968). 7
Utility thereby denotes as following: Utility for an action x: U ∈ℝ=U x
The utility calculus for an action x could thus be for instance (regarding to the act of voting):
U xe =P x ×B x −C x
However, this calculus is an example of what such a calculus could consist of only. It is specified to the circumstances and peculiarities of the voting act. It diminishes the possibility that the costs will unexpectedly rise what may hold true for the act of voting but not for all other actions. Hence there is no calculus that could describe all individual human actions correctly. It needs to be adapted to the respective circumstances in order to be applicable. According to assumption three an actor can always make a decision when he faces two alternatives. By comparing the two utility­values of these alternatives an actor is able to discern the most efficient course of action. Disregarding the possibility that he misestimated the benefits or costs we can put up a differential: The decision­differential: U x −U y
If the result is positive, the actor goes for action x. If it is negative he chooses y and if it is zero he makes no decision (Downs 1957).
Now we know the mental framework of a rational actor and how he makes a decision. But at this point we do not know who this actor actually is and in what environment he acts. The Principal­
Agent­Model is able to model this environment and moreover fits very nicely into the core­
assumptions of Rational Choice Theory.
2.3 The Principal­Agent­Model
It was initially designed to model economic relations such as a relation between the owners of a company and its managers. But soon it entered the stage of political science. It was used to model bureaucratic relations within public institutions. Essentially it is concerned with the design of rules by the principal “which are directed at assigning tasks to the agent […] and intended to regulate exchange with a client” (Lambsdorff 2006, 15). A principal could be for instance the government which sends an agent, an ambassador, to the United Nations to deal with a client, 8
other ambassadors (Lambsdorff 2006).
However, due to the design of this principal­agent­relation, several problems occur; they are often referred to as 'the agency problem' The principal faces a constraint of resources, such as time, which leads him to delegate some tasks to an agent. This agent in turn gets thus a surplus of informations compared to the principal. The problem is that a principal can not perfectly observe, control or even evaluate whether the agent did his job properly: he faces severe monitoring problems (Lambsdorff 2006). Even if the principal based his evaluation on the outcomes an agent produces by a certain action, he can not be sure that this outcome was definitely produced by his agent and not by someone else, a client for instance and additionally faces the problem that an agent can – in any imaginable situation – only influence the outcomes but not deliberately determine them. Hence the agent and his principal are autonomous actors, each of them has his own goals (see assumption eleven) and therefore his own utility­function. The cost­benefit­
analysis of the agent does not necessarily match the one of the principal, that is: the preferences of the principal and the agent does not necessarily match. The utility­functions of a principal P and an agent A could read like this (Groenendijk 1997): Utility­set­up of principal P and agent A: U P =U a , b , c≠U A=U d , e , f 
But it is possible that the agent produces goods for the principals' good as an externality (see assumption twelve). The means to do that is a contract which defines the task and determines the payment of the agent. This contract shall be enforced by sanctions, that is the loss of the payment. But – as shown before – it is hard for the principal to discern whether the agent fulfilled his tasks or not. The principal thus faces a problem of credibility regarding possible sanctions and or bonuses. The same holds true for the agent who wants to conceal as much of his work as possible in order to not lose his informational advantage. But the harder he tries to conceal his work, the more possible it is that the principal doubts the agents commitment and hence starts to increase monitoring or even depose him from office. The agent thus needs to bond with the principal. There are, however, three basic ways to solve the problem. They are all initiated by the principal because hierarchally he is at the top (Groenendijk 1997):
At first the principal could increase the incentives for the agent to do his job properly, e.g. he could increase the payment or he could increase the punishment. This way the principal does not change the goals of the agent, but he increases the probability that the agent does not defect 9
because he increases the costs of doing so. A second possibility is persuasion. Thus the principal would try to change the agents goals, but not his utility­function. The new utility of A could look like this: U A=U a , b , e
Thirdly the principal could use directives to narrow down the set of possible actions the agent has. This does not necessarily change the agents utility function or his goals and the agent is still as hard to monitor as he has been before.
Studies name (e.g. Lambsdorff 2006) a lot more methods to solve the principal­agent­problem but they are all examples of the three mentioned, general descriptions. Anyway, the agency problem plays a crucial role, if we want to model the phenomenon of corruption. It could be interpreted as the actual micro­level­reason for corruption moreover . But before we can discern the peculiarities of Rational Choice and Principal­Agent­Theory regarding corruption, we need to have a closer look at corruption itself to identify the most important features of this phenomenon.
3 The phenomenon of Corruption
3.1 The Definition of Corruption
Corruption literature proliferates many different definitions of corruption. Up to this point no widely accepted definition was brought up. The main problem of defining corruption is to mark the border between acceptable gifts and non­acceptable bribes, between useful networking and harmful cartelling or clientelism. This differentiation though is not a conceptual or theoretical problem but a cultural one. To give anecdotal evidence: Whereas it is completely normal in a Turkish village to point out to the foreign visitor that the own uncle is the chief of police and could surely help if there is any kind of problem, in a French city such an offer would be very unlikely because it would be perceived as somehow 'wrong'. Thus we can not define corruption based on an actual measure of the corrupt act. But there is the possibility to define it based on laws, so to say: 'Corrupt is, what is defined as corrupt in the law.' But the problem remains. If we accepted corruption as an anthropological constant, we could not uphold the superiority of the 10
law because laws are a product of their respective society. It is thus logically perfectly possible to be corrupt without doing something illegal. Following these observations, we need to define corruption in more general, but culture­flexible terms. Transparency International itself came up with a very short, but precise definition: Corruption is the “misuse of entrusted power for private gain“ (Transparency 2008). The main component of this definition is its public­private­dimension. Whereas an corrupt agent seeks to increase his private benefits he defies his public responsibility, a responsibility that was given to him, or “entrusted”, by a principal, may he be a chief of a department or the electorate. If we look at the suggestion of Klaus Offe, we can see the conceptual value of this point: Corruption is a “bilateral, a voluntary and deliberate illicit deal between two actors involving the exchange of official decisions for some payment, or promise of payment“ (Offe 2004,78). Offe does give a quite comprehensive description of the corrupt act, especially his mentioning of the voluntary factor of corruption is noteworthy, but he does not explain where 'illicit' stems from, who defines what illegal is and what not. Nico Groenendijk in contrary sees corruption “as any unauthorized transaction between agents and a third party” (Groenendijk 1997, 210). In his view the transaction becomes corrupt when it is 'unauthorized', that is without the approval of the principal. But the problem remains that a principal can push corruption­criteria that are so narrow that almost nothing is corrupt and that otherwise corrupt acts become a mere disobedience. The before mentioned argument concerning laws holds here true too. Essentially Groenendijks suggestion lacks a term concerning the motivation of the corrupting agent. But all three mentioned definitions are still to technocratic; they fall short of accounting for substantial human needs that need to get fulfilled. Imagine a situation in which client K had a car accident in a tropic country, gets injured but is still able to walk and talk. Actually K would not need to see a doctor. He is alive. But the tropics clima favours the spread of harmful wound infections. Thus K goes to see Agent A, a doctor, who would give him medical attention if he pays a certain amount of money on top of the regular price. Faced with the alternatives of a potential mortal infection or a corrupt deal, K pays the extra money. K bribes and corrupts A – deliberately and for purely private reasons. But K had no real choice if he had not wanted to risk his life. He acted in self­defence. Thus we need to exclude the aspect of self­defence from the definition of corruption. Hence this paper will use the following definition of corruption: Corruption is an actors deliberate misuse of entrusted power for private gain, in case he does not 11
face a life­threatening situation. Moreover we could discern between political and bureaucratic corruption. We speak of political corruption when the corrupted agent was elected and we speak of bureaucratic corruption when the agent was not elected (Lambsdorff 2006).
3.2 The Impact of corruption
If we tackle the phenomenon of corruption we tackle one of the most severe problems administrations and governments face since there establishment. In countries of all political, institutional, historic and cultural backgrounds occurs corruption. The question is not whether there is corruption, but how widespread and intense it is. A look at the current Corruption Perception Index (CPI) by the NGO Transparency International underlines this fact: None of the 180 included countries gets 10 out of 10 points. Denmark leads the index with 9.3 whereas Somalia gets a mere 1.0. Just about one third of all countries gets a score better then 5.0 (Transparency 2009). The consequences of corruption are as severe as they are wide­reaching. The current literature suggests that corruption •
lowers the total amount of Foreign Direct Investments (Wei 2000).
•
increases the total size of the underground economy (Johnson/Kaufmann/Zoido­Lobaton 1998).
•
reduces government revenues (Johnson/Kaufmann/Zoido­Lobaton 1998).
•
lowers environmental regulation and thereby promotes pollution (Welsch 2004) .
•
increases economic inequality.
•
lowers levels of social trust.
•
lowers level of justice fairness (Uslaner 2008).
The effects of corruption become even more severe, if we acknowledged that it is 'sticky', that is path­dependent (Uslaner 2008). To sum it up: Literature suggests that corruption is harmful. But there are other opinions. Some suggest that corruption could be some sort of grease for a dysfunctional bureaucracy with too much regulation and thereby a way to keep economy and 12
society running (Huntington 1990). But nevertheless: if corruption had these effects then just for a short amount of time. In the long run it worsens the dysfunctionality of the bureaucracy because bureaucrats have strong incentives to protect the regulations and even increase the number of hurdles to get even more bribe revenues (Rose­Ackerman 1999). That is why I assume that corruption should be fought against. 3.3 The Roots of Corruption
There are as many models to explain the phenomenon of corruption as there are schools of thought in political science. To get a more general view we can sort the different approaches in macro, meso and micro­models. Graphic 1: Relations of Models of Corruption; own graphic
Samuel P. Huntington for instance describes corruption on a macro­level focusing on institutions. He understands it mainly as the consequence of social modernisation. According to his model corruption occurs when radical external changes force a country to change its government system from authoritarian to democratic and thereby initiate a change of values. New social actors push for change but do not have democratic channels to express there opinion yet – thus they become corrupt. The increase of the number of laws and rules that accompanies this regime change even worsens corruption once more. The countries of the so called 'third wave of democratisation' are 13
an example for Huntingtons theory, especially the post­colonial states of Africa (Huntington 1990). Approaches that focus on values are part of this school of thought. Their reasoning is straightforward: If a society does not value public service and civil commitment, the likeliness of corruption rises (Treisman 2000). A second approach focuses on the soft, social factors of the meso­level in explaining corruption. Eric M. Uslaner is one of the main proponents of this approach. According to his model, it is the degree of economic inequality, general level of trust and the efficiency of the justice system that determines how corrupt a country is. This three aspects together build the so called “inequality trap” (Uslaner 2008,5): high levels of economic inequality lead to the establishment of a economic elite that tries to secure its influence via clientelism and cartelling. It is especially the justice system that suffers of this development because “no other political institution is predicated upon equality to such an extent” (Uslaner 2008,21). The population loses its trust in the governing system, such as police forces and judges, and thereby stops trusting each other because their (economic) rights and contracts are not protected any more by a third force. Social control disappears, the level of corruption and crime rises among the non­elite population and thereby increases the economic inequality even further (Uslaner 2008).
A third approach mainly developed by Susan Rose­Ackerman, Johann Graf Lambsdorff and Nico Groenendijk focuses on the micro­level, explains corruption as failed actor­to­actor relationships. It is this approach that stands in the centre of this paper. But by focusing on the micro­level I do no want to doubt the validity of the other approaches. Contrarily I acknowledge that corruption is a social, institutional and cultural phenomenon that needs to be tackled in a holistic way. Graphic 1 shows on which sphere I concentrate as part of a bigger attempt to understand corruption and consequently fight it properly. The relationship between the three mentioned levels, macro, meso and micro, is a causal one. Because since we can imagine how a single actor bribes another actor, we can estimate the costs, benefits and utilities involved. But focusing alone on the micro­cosmos does not explain why there are differences between quite similar countries in the level of corruption such as in Slovenia or Romania (CPI­Score Slovenia 2008: 6,7 and Romania 2008: 3,8) or why the corrupting actor is forced to bribe in the first place. To understand these facts we need to look at the meso­level, at facts such as the general level of trust, economic inequality, institutional design or fairness of the justice system. These factors are themselves related to the historic legacy and developments of a 14
country on the macro­level. To sum it up: this chapter presented a definition of corruption, showed what severe consequences corruption can have and outlined the possible reasons for it. The decision to focus on the micro­
level is yet a rather practical one. First the scope of this paper does not allow me to include more aspects and secondly is the actor­level the decisive one. If the principal can not change the cost­
benefit­ratio of these actors, he can not change the status quo of corruption in general. Every corruption fighting method needs to influence, directly or indirectly, the actors' utility­functions in the respective departments, police stations, parliaments, town halls and so on. The deliberations of the following chapter shall thus serve as a starting ground for more comprehensive and holistic approaches in corruption fighting, may they be practical or theoretical. 4 Applying Rational­Choice­Theory to Corruption
4.1 The basic assumptions reviewed
There is the need to adapt some of Anthony Downs assumptions to the special case of corruption1. Because if we continued in our deliberations without doing so we would entangle ourselves in unsolvable logical paradoxons.
Assumptions one to seven2 fit to the circumstances of corruption very nicely though. They describe the mental framework of the agent, the client and the principal and thus pose no problem. Nevertheless, assumption eight is problematic:3 the separation between the polit­
economic sphere. This separation might work to explain voting, government formation or party behaviour but it is not applicable to the phenomenon of corruption. Corruption mixes per definitionem 'political devices' and 'nonpolitical purposes'. Let us assume for instance that Actor A works at the communal Building Department and has to decide between several building offers 1 In the following chapters I speak only of bureaucratic corruption.
2 (1.) Human behaviour is “reasonably directed toward the achievement of concious goals” (Downs 1957, 4)
(2.) A rational man “uses the least possible input of scarce ressources per unit of valued output” (Downs 1957, 5).
(3.) An actor can always make a decision when he has got two alternatives to choose from.
(4.) An actor can rank all alternatives in such a way that each is either superior, inferior or indifferent to the others.
(5.) This rank­order is transitive.
(6.) The actor always chooses the highest­ranking alternative.
(7.) The actor would always choose the highest­ranking alternative, if the set of alternatives does not change. 3 (8.) An actor can only behave rational as explained in assumption 1­7 within the borders of the economic and political sphere. 15
for the new school. If A obeyed the regulations he would choose the cheapest offer, but entrepreneur K who made a more expensive offer bribes A. Thus K gets the building assignment. A spends the bribe on a new sports car and thus used a 'political device', communal procurement, for 'non­political purposes', to make a dream come true. We thus need to abolish this assumption completely. This is possible for this paper because I am, in contradiction to Downs, not aiming at a retrospect, causal explanation of a certain human behaviour, but at a rather descriptive, stylized model of corruption – at no point assuming that a cost­benefit­analysis is the decisive reason for an actor to act. However, assumption nine4 holds true for the special case of corruption. The probability­problem regarding the costs and benefits corrupt agents and clients face might even be more severe. Because in contradiction to such acts as voting5 the costs are not fixed. The cost for polling does not change over time because an actor simply needs to get informed – not necessarily though ­, make his way to the voting booth, vote and make his way back. No other costs occur after the election as long as the voter does not tell anybody who he voted for and therefore needs to justify his decision afterwards. Corruption is different though. There is at all times the possibility that an agent or the client gets caught, if not by the principal himself then by a fourth actor such as a journalist or a prosecutor. Depending on the country both work in, (1) the client may face a legal prosecution and (2) the agent not only faces the loss of his job and therefore of his payments but legal prosecution too. There is, no matter how sophisticated the corrupt act was in the first place always a chance of getting caught and thus a chance that the involved costs rise unexpectedly. Of course the same holds true for the benefits, unless the corrupt transaction does not take place, at the exact same time or is legal and can be enforced by law. The specific dynamics of the agent­
client­relation are the reason for that (see Lambsdorff 2006 for detailed description). We thus need to alter, following Downs assumption nine, the calculus for an agent A and a client K as follows:
The­Corruption­Calculus for an agent A and a client K for their respective actions x or y:
U xA,, yK =P B×B Ax ,, yK −PC ×C Ax ,, yK
The assumptions ten6 and eleven7 fit to the phenomenon of corruption without any alterations. 4 (9.) He thus faces a certain degree of uncertainty.
5 Voting Calculus: U= P*B­C
6 (11.) A rational actor “requires a predictable social order” (Downs 1957, 11).
7 (12.) A rational actors seeks mainly selfish goals.
16
Assumption ten holds true as long as the principal and the client behave rational and thus predictable. There might be, however, the possibility that any of the two participants of the corrupt act, the agent or the client, hide their true goals, costs or benefits and thus seem to behave irrational. The other actor faces the problem of incomplete information in this case and can not discern the rational pattern of behaviour that actually exists. Concerning assumption eleven, we might add that the corrupt act in itself is a prime example of selfish behaviour. There is no way to deduct altruistic goals from a corrupt act as it is defined above, because the misuse of entrusted power, may it be for instance the withdrawal of entrusted money by the agent has to harm the principal, the owner of the power or the money. Even if the agent gave all the money to a third actor, still there would be the damage he has caused to the principal. The power an agent wields is indivisible: he either has it or not.
Assumption twelve8 is applicable to corruption ­ at least when one models it in terms of a principal­agent­relation. Because at the core of this model lies, as shown in Chapter 2.3, the assumption that an agent would not fulfil the principals' tasks without incentives of any kind, may there be high costs of defection or high benefits for compliance. Or to put it differently: a principal tries to give enough incentives that his agents' goals match the principals tasks and the agent thus produces actions for the good of the principal as an externality. Hence if one finds a way to conciliate the agents personal goals with the principals' own demand for collective goods the level of corruption would decrease. But I actually need to amend the set of assumptions. For the sake of parsimony we thus assume that there are no networks on both sides of the corrupt relation: •
All actors are unitary actors.
4.2 Analysis of Corruption
4.2.1 The Principal­Agent­Client­Constellation
Modelling corruption with a principal­agent­approach goes analogous to assumption eleven since a principal­agent­relation is a predictable social order per se. The agent and the principal have perfect information about their respective position in this order as long as their contract is 8 (13.) Rather then being an end in its own right, actions for the greater good are an externality of goal­seeking behaviour.
17
exhaustive. But further examining the specific constellation of agent, principal and client in a corrupt exchange will help to understand the involved Costs and Benefits and thus help to develop strategies that change the cost­benefit­ratios of the participating actors. In principle, disregarding the reason for corruption in the first place that are placed on the meso­
level (see Chapter 3.3). A stylised, successful corrupt act can be described as follows: 1 A client K evaluates corruption as rational for fulfilling his own goals.
2 K searches for a corruptible agent X within a bureaucratic unit that is controlled and monitored by principal A. 3 K needs to discern first which agent is corruptible and which one is not.
4 Ultimately K finds a corruptible agent X, he will be named A.
5 Thus K offers A some sort of incentive to differ from P's prescribed tasks and regulations in order to promote his own goal.
6 A evaluates the offer of K and decides to take it or not.
7 If A agrees, the corrupt deal becomes reality.
8 After the deal is done, both K and A still face the danger of an unexpected cost rise due to discovery of their doings.
9 A and K may re­evaluate their situation and stop or repeat the process. 10 The principal does not know anything during the whole time.
This proceeding does not need to get initiated by a client K necessarily. It is imaginable that the corrupt agent A starts to search for a corruptible client K himself. If so, A and K simply trade positions. A new principal­agent­relation between A (agent) and K (principal) emerges in effect (Groenendijk 1997). The main preference of the principal is to decrease the level of corruption; he assigns the highest utility to it, whereas the agent and the client are interested in hiding their activities before the principal, they assign they highest utility to that. 18
4.2.2 Typology of the involved Costs and Benefits
I already presented a utility­function9 that is applicable and more suitable to the phenomenon of corruption then the ones used to model voting for instance. This function however does not disclose any detailed information about the specific set­up and relations of the costs and benefits involved for the three participants. Nico Groenendijk gives a thorough overview presented in Table 1. Nevertheless this typology needs one explanatory amendment: the principals' costs and benefits are the decisive ones if we would like to discern if a corruption fighting strategy is feasible or not. Because it is only in the principals' interest that corruption decreases, it is not in the interest of the other two corrupt actors. Hence if we wanted to deduct possibilities of corruption fighting we would need to alter the cost­benefit­relations of the agent and the client, we needed to “destabilize the corrupt relationship” (Lambsdorff 2002, 221).
Principal P
Costs
Corrupt Agent A
Corrupting Client K
•
increased failure costs
•
Searching costs
•
Searching costs
•
costs of monitoring and •
Negotiating •
Negotiating preventing corruption
•
negative externalities if P's Costs
•
and C's preferences do not match
•
probability of costs regarding Covering­up Costs
•
Moral Costs
•
Probability of a a penalty given by P
penalty
Costs
•
Bribe
•
Covering­up Costs
•
Moral Costs
•
Probability of a penalty
Benefit
s
•
•
Possible yields of penalties
Positive externalities if P's and C's preferences match
•
Bribe
•
Table 1: Costs and Benefits in a corrupt exchange based on Groenendijk 1997
9
19
A,K
A, K
A, K
U x , y =P B×B x , y −PC ×C x , y
Service rendered/good provided by A
5 Strategies to fight Corruption
5.1 Increasing Costs, Decreasing Benefits of Corruption
I start by looking at the costs of the agent and the client and continue by discerning the probabilities. There are by principle two kind of costs: (1) the ones that can be altered by the principal on short notice and through prime administrative measures and (2) costs that could be altered when the administrative measures are accompanied by a more holistic approach. The first are searching costs, negotiating costs, covering­up costs and the bribe. In the second category fall the moral costs because morality can not be changed by an directive. We thus assume that a principal cannot change the moral costs effectively.
If we look at the searching costs we see that there are three basic ways a corrupt relation could be established: (1) the client knows the agent already, (2) the client knows a middlemen who knows the agent and (3) the client does not know a corruptible agent. The costs are highest in the latter. A principal thus needs to foster an administration where his potential corrupt agent has got as less contact to potential corrupt clients or to middlemen as possible. But he cannot – of course – forbid contact completely or hide the identity of his agents because they need to work by definition with clients. One measure would be to decrease chances that the agent builds a relationship to a client by rotating the agents within the department or even across departments, let us say every two years. This however charges the principal himself with massive teaching costs because he needs to break in new agents every two year. Moreover it decreases the potential benefits of the principal due to the loss of expertise that would occur every two years. This method is not feasible for the principle if done repeatedly. The costs, however, may be bearable if it is done only once. The principal could even employ more agents to monitor the relationships of his agents – there however applies the agency problem again, the monitoring costs would be very high and the utility thus very low. There are many other possibilities that are similar to the ones mentioned above, such as an directive that forbids the agents to meet clients in private e.g. in the Squash Club but with all these measures comes the fundamental agency problem along. A principal thus cannot efficiently prevent his agents from contacting corrupting clients or vice versa.
We thus turn to the second costs, the negotiating costs. A principal cannot change the negotiating costs of a corrupt exchange directly because he does not know of the negotiation in our model. 20
Negotiation is done between an agent and a client. He could however influence them generally by increasing the basic contacting costs of the agent and the client e.g. by standardly recording all telephone conversations the agent makes. Apart from the ethical implications of doing so the principal would need more agents once again to listen to all the conversations.
The described arguments hold true for the covering­up costs too. The better the principals' monitoring of the agent the higher are covering­up costs. But in return are the monitoring costs higher and the more severe is the agency problem.
There is, however, the possibility of making the bribe as costly as possible. In our model we cannot possibly assume that the resources of the principal are unlimited and we cannot decide per se if a rise in payment of the agent would be feasible for the principal without doing empirical research. A rise of payment, however, brings some basic advantages compared to the other strategies. The payment rises and that is it. The principal does not need to monitor more agents or incalculate a massive loss of benefits as with altering the other types of costs. The reasoning behind a payment­rise is straightforward: the higher the payment, the lower is the risk that a risk­averse agent defects and becomes corrupt. Moreover the client needs to pay a higher bribe, his costs increase. The benefits the client receives is a certain, previously agreed on service or good. A principal who wants to reduce the benefits an agent can provide to a client has just one option without increasing his own monitoring costs for this particular agent: withdraw power and resources from the agents desk. The principal thereby narrows down the total amount of benefits an agent could deliver to a client. But: if the agents powers are too limited in scope his service could be rendered completely useless to the principal and moreover the principal needs to delegate the power to another agent if it is not possible to withdraw this power completely from the respective bureaucratic unit. It is thus reasonable to assume that the benefit a principal could receive by preventing a certain agent of getting corrupted gets balanced by the costs the monitoring of the other agents induces. Therefore the principal is in a difficult position. At one hand he has to make sure that no one of its agent becomes too powerful and the potential benefits the agent could receive from misusing this power too high, and on the other hand he has to weigh into his calculations the efficiency an agent could possibly deliver with a certain amount of restrictions. Therefore we can not deduct any corruption strategy by just looking at the general benefits of the client or the agent.
21
5.2 Altering the Probability
At first glance altering the probabilities seem very useless because at the core of them the agency problem lies after all: if the principal can not monitor the agent perfectly, defection, that is in our case corruption, is more likely. Thus, closely linked are monitoring and probability of the costs and benefits. The same holds, with restrictions, true for the probabilities of the costs and benefits themselves at least if the corrupt act is illegal. Because in this case the costs rise dramatically while the benefits decrease dramatically. If an agent or a client gets caught he faces not only punishment and thus higher costs but also a payback of the benefits he received as a compensation payment to the principal. But enforcing payback of benefits that were illegally accumulated is usually not part of the principals authority in a bureaucratic relationship, he thus needs to focus on increasing the probability of the costs – without increasing the monitoring costs. That seems to be a contradiction.
But Anthony Downs gives a clue on how to solve this riddle by formulating his model of a democratic two­party­system. He assumes that parties in a democracy are vote­seeking, they „formulate policies in order to win elections, rather than win elections in order to formulate policies“ (Downs 1957, 28). According to him parties compete with each other in order to get as many votes as possible and thereby the possibility to seize power. But because the voter is the decisive actor in a democratic election parties try to increase the benefits for the voter as much as possible and thereby the incentives to vote for them. Thus the collective good 'democracy' gets produced – even though, or better yet, because parties are only interested in their own personal gains. In the case that Downs describes the preferences of the voter and the party match – they both assign the highest utility to the act of voting and thus the system of democracy rather then to coup d'etats or abolition of the state. The parties want a democracy because they want to govern for a secured period of time as costlessly as possible and the voters want a democracy because they want to participate without paying the costs of becoming politicians. If we convey this set­
up to the phenomenon of corruption the description could be stated as follows: in order to produce the collective good 'efficient bureaucracy without corruption' the bureaucratic principal needs to find an actor who shares his own preferences and assigns the highest utility to non­
corruption.
Assuming that the respective bureaucracy does not serve another bureaucracy actors who can be interested in an efficient bureaucracy are at first the politician at the head of the bureaucratic unit 22
and then the public who gets governed by the politician. At least, in democracies the public is always the principal of the politician because he is elected by it. A state, however, is per definitionem always aimed at a population and thus liable to that population – we could say, by relaxing some assumptions of the traditional model, that the population is the principal of the state and thus of the politician. We can thus assume that the public is the principals' principal in our model of a bureaucratic corrupt exchange. That is why their preferences match and why they both want to decrease the level of corruption. What the principal of our model can do now, based on the previous insights, is to use his own principal, the public, as a de­facto agent, to use the monitoring interest of the public for his own goals. He is not, of course, authorized to issue directives to them but he can delegate authority to to them: the authority to monitor his agent and thereby outsources monitoring costs and increases the probability of the corruption costs. What seems as a way to outsmart the public fits very nicely if we consider that the preferences of the public and the principal match. The respective public I am talking about consists predominantly of citizens, opposition parties, NGO's, journalists, companies and similar actors in a state. We nevertheless treat the public as a unitary actor for the sake of argument. But this only holds true if we assume that the principal assigns the highest utility to corruption fighting (as we do in our model). But this is not necessarily the case in every set­up. It depends on the costs the corruption inflicts generally. This is a substantial drawback to the matter of corruption fighting considering that the principal can be interested in staying in office himself. Thus if the public had been discovering a corrupt act in his bureaucratic unit, he could be hold liable even though he did not know anything of the agents' doings. The probability of the costs of outsourcing increase dramatically for the principal. He thus needs an incentive to do so e.g. the assurance, or better yet, a contract that states he will not lose his job if a corrupt exchange gets discovered in his bureaucratic unit – as long as the principal has not recklessly or consciously supported the corruption. If we look at the outsourcing process in detail we see that the principal faces costs though. These are the costs to include the public in the monitoring process, that is to make the information available that they need in order to monitor effectively. I call them the transparency costs; they resemble the everyday transaction costs that occur in traditional principal­agent­relation These costs would occur regularly with each bureaucratic transaction that needs to get monitored and 23
could thus be minimized if automated. But there is no way to eradicate them ultimately. A rational principal who assigns the highest utility to corruption fighting should nevertheless share the monitoring of an agent with the public. This holds true due to three reasons: (1) compared to other alternatives where traditional agents are included no agency problem and thus no massive rise of monitoring occurs. (2) The principal can outsource some of the monitoring costs that are not primarily related to corruption fighting too, (3) he might thus even reap unsuspected benefits e.g. informations about the general working attitude of the agent as an externality. 6 Critique
Even though the result of this paper seems pretty conclusively, there are some points to be considered in future research which I excluded due to time and methodological reasons. Downs, for instance, introduces another factor into a typical cost­benefit­analysis: time. He even assumes that the ability to eradicate systematic mistakes over time distinguishes a rational actor from an irrational actor. If we like to model corruption and therefore corruption fighting more precisely, we would need to include this factor into the calculations, thus adding an explicitly strategic momentum to the dynamics of a corrupt relation. This so called trend factor seems especially important for the analysis of the agent­client­relation. I spared out that point because it is not directly changeable by a principal and thus not necessary for a principal­focused­approach to corruption fighting.
Secondly problematic is the assumption that all three and later four actors in my model are unitary actors. Regarding for instance the prevalence of corrupt networks in the post­communist states in Eastern Europe (Karklins 2005), a model that incorporates the dynamics within these networks is duly necessary. Thirdly problematic is the application of my model from a more general point of view: the transformation of the result into practical strategies. There are not only great differences in the specific institutional and cultural set­up between the countries regarding corruption (Alemann 2005), moreover there are detailed practical questions that needed to be answered before applying the proposed strategy, such as: How could a bureaucracy make their documents available to the public? How shall be dealt with the need for privacy of the clients? 24
7 Conclusion
It has been the aim of this paper to propose an anti­corruption strategy, based on Rational Choice reasoning, that principals could use in a bureaucracy. In order to that I needed to amend and abolish some of the main assumptions of the Downs'ian model. Especially the separation between a polit­economic sphere and the rest regarding an actors' rational behaviour is not applicable to the phenomenon of corruption. Furthermore, I used a principal­agent­approach to model a corrupt exchange and showed that the basic corruption calculus for an actor needs an additional P­Term for the costs.
Thereafter I analysed the costs, benefits and probabilities involved in a corrupt exchange regarding the principals' capability to change them in order to fight corruption. It is hard to increase the costs without facing severe agency problems and new monitoring costs by introducing new agents. The benefits of the client can hardly be changed too without redesigning the whole institutional set­up of the bureaucratic unit and without facing a cost­circle. Contrarily, the benefits of the agent can be influenced by the principal without any further costs except the costs of a payment rise that would be necessary. The probability of the, in this respect closely linked, costs and benefits can be altered nevertheless. A principal needs to make the information available to the public which is necessary to monitor the agent. The public will do so because it has got a preference to monitor the agent as well. For the principal no other costs occurred except the transparency costs – but only as long as we assume that the principal prefers corruption fighting to other modes of action.
Thusly the Rational Choice approach proved to be a useful tool to devise an anti­corruption strategy for the micro­level. But empirical testing of the main results of this paper would be desirable to further validate the righteousness of the proposed strategies. 25
References
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Asseveration
Ich versichere, dass ich diese Seminararbeit ohne Hilfe Dritter und ohne Benutzung anderer als der angegebenen Quellen und Hilfsmittel angefertigt und die den benutzten Quellen wörtlich oder inhaltlich entnommenen Stellen als solche kenntlich gemacht habe. Diese Arbeit wurde in gleicher oder ähnlicher Form noch in keinem anderen Seminar vorgelegt. Mannheim, den 4. Mai 2009
Unterschrift
Rico Grimm