legalizing bribes - world banksiteresources.worldbank.org/extlacofficeofce/resources/...motivation...

Legalizing Bribes

Martin DufwenbergUniversity of Arizona, University of Gothenburg, and CESifo

Giancarlo SpagnoloSITE-SSE, EIEF & Tor Vergata

World Bank, April 3, 2012

Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 1 / 1

Motivation

Corruption remains an endemic problem in many countries

Central elections’ theme in India (many recent scandals, AnnaHazare’s jailing & hunger strike, demonstrations...) and the US(Chicago...)

Clever recent empirical work advanced our understanding of howwidespread and damaging it can be (e.g. Svensson 2005,Olken&Pande 2011)

Lots of policy interest:

World Bank financed hundreds of programs and studies on corruptionseveral international anti-corruption treaties signedmany OECD reports, activities, etc.Transparency International became a multinational corporation...


Motivation Cont’d

However, from a theoretical and a normative perspective “researchhas been lagging behind policy” (Banerjee et al. 2011)

Economic research did not yet identify a set of concrete and robustanti-corruption tools, apart from some (important) general principleson transparency and monitoring

“On the one hand, there has been a revolution in themeasurement of corruption and this has, in turn, led to ablossoming of the academic literature on corruption. On theother hand, if we were asked by a politician seeking to make hisor her country eligible for Millennium Challenge aid or the headof an anti-corruption agency what guidance the economicliterature could give them about how to tackle the problem, werealized that, beyond a few core economic principles, we hadmore questions to pose than concrete answers.”(Olken andPande, 2011)


This paper

We analyze a specific legal tool recently proposed and intenselydebated in India

Starting point: Kaushik Basu’s (2011) note “Why, for a Class ofBribes, the Act of Giving a Bribe should be Treated as Legal.”

Aim: deter harassment bribes which people pay for services they areentitled too

Legalize bribe-giving, double the fine for bribe-taking, andmake the bribe-taker in addition have to pay back the bribe ifdiscovered

Incentive for bribe-giver to report bribe-taker; if foreseen, bureaucratsmay not accept bribes


Questions and current debate

Will Basu’s proposal be beneficial?

Does the answer depend on institutional details?

Hot debate in Indian and international newspapers:

The Economist sympathetic (“Who to Punish,” May 5, 2011) asProf. Seabright on Le Monde :-) (May 24, 2011)

Some commentators outraged, discarded proposal as absurd andimmoral

Thoughtful criticism by Jean Dreze on Indian Express (April 23, 2011)


What do we do

Basu’s note and following replies are informal

Related literatures on tax amnesties, leniency and whistle-blowerssuggest these schemes are subtle: effective if well designed andadministered, counterproductive if details not set right

Understanding pros and cons of Basu’s proposal requires formalanalysis

We build and study a simple model of the Basu proposal

Potentially relevant for Swedish/Danish/Norwegian prostitution law


Plan of the (rest of the) talk

1 Stylized one-shot “harassment” bribery game with entrepreneur-civilservant interaction

2 Variations: one of the parties is a ‘long-run’ player

3 Dreze’s moral, legal, and practical concerns

4 Modified proposal in the spirit of leniency

5 More harmful forms of corruption


The one-shot case

Players:E : entrepreneur who deserves a licenceS : civil servant who should give licence to E

Actions and Payoffsc : cost to S of issuing a licencev : value of licence L to E , v > cb : amount of the bribeFE , FS : status quo fines if corruption discovered, FE ,FS > b

Initial assumption: 0 probability of conviction without report


The Game Tree


Cost of delivering licences

We consider both c > 0 and c < 0 (not because c matters to welfare;S hired with mutual understanding licensing expected!)

Sign of c matters to E ’s and S ’s decision and each case makes sense

c > 0 relevant e.g. because effort is costly

c < 0 relevant e.g. because of possible risk of beingcaught-in-the-act-and-fired

Both considerations relevant, c should be interpreted as net effect


Payoffs and welfare

Discount the relevance of all payoffs in the game on welfare

Many see corruption as a bad per se because of negative externalities

Licences are also good, and if corruption increases them trade-offdifficult

⇒We use two qualitative yardsticks to evaluate welfare:– To what degree are bribes deterred?– To what degree are licences issued?


One-shot corrupt exchange, c > 0

Dominant choice: −Rin subgame

Unique associated SPE:S chooses AL followingB, −L following −B.Best response for E is B

Outcome: E offers abribe to S who acceptsit & issues a licence; noplayer reports


One-shot, c > 0 : Welfare

Assume S sets b, cannot observe v ∼ U[0, 1]

If v < b no bribe from E , no license from S . Then S chooses b to

maxb(1− b)(b − c),

so b = (1 + c)/2.

Kind of second best:

Sometimes bribes paid, when v > (1 + c)/2, partially bad

Sometimes licences delivered, when v > (1 + c)/2, partially good


One-shot, c > 0 : Basu’s proposal

FIGURE 2: BASU PROPOSAL

b-c

v-b

-c-2Fs

v

-c-2Fs

v

-c-2Fs

v

E B S

A+L

¬A+L

¬A¬L

v

-c

O

O

¬B

L

v

-c

O

O

¬L

¬R

¬R R

R

Two SPEs((−B,R), (−L,−A−L,−R)) &((B,R), (−L,−A−L,−R)) with sameoutcome:S does not accept anybribe & does not issueany license

Welfare: corruption isdeterred, very good; nolicences are issued,pretty bad

Discussion: “good andbad corruption” debate


One-shot corrupt exchange, c < 0

Back to Figure 1, unique SPE: ((−B,−R), (L,AL,−R))

Outcome: E does not offer any bribe, S (always) issues licence toavoid paying c

When c < 0 Basu’s proposal redundant


One-shot corrupt exchange: Discussion

If alternative policies available that change c > 0 into c < 0...

What if competition among several Ss?

c < 0, irrelevant; c > 0, bargaining power to E , who sets b = c + ε

More but smaller bribes, more licences issued

Basu proposal? Deterrence, but reduces licenses more


Long-run S , short-run E

Civil servants often deliver licenses for long periods to many entrepreneurs

Suppose S is long-term player facing infinite sequence of short-term E

Each t = 1, 2, 3... E ’s valuation v is an independent random draw

Common 0 < δ < 1, past history common knowledge (Fudenberg,Kreps and Maskin 1990)

Short-term players play best-response, long-term player may commit...

Perpetual play one-shot equilibrium is always an (continuation)equilibrium

Commitment by LR-player may create other equilibria; we focus on thosewith lots of bribes and check impact of Basu’s proposal


Long-run S , short-run E ; c > 0

The repeated short-run SPE with Es offering at any given round abribe if v > b, and S in each stage game choosing b = (1 + c)/2remains the relevant equilibrium

As in the one shot-case, the Basu proposal is implemented:corruption deterred, good; licenses not delivered, bad


Long-run S , short-run E ; c < 0

Perpetual play of one-shot eq. one possibility, but...If S is sufficiently patient now he may commit not to deliver the licencewithout a bribe

S : Accept the bribe and issue a licence if E offers a bribe. Do notissue a license if E does not offer a bribe

Each E : Offer a bribe if v > b and S always issued a license everytime a bribe was offered and did not issue a license every time nobribe was offered. Do not offer a bribe otherwise. (Note: Collectionof E ’s implement ‘trigger’)


Long-run S , short-run E ; c < 0 Cont’d

SPE if S will not deviate, iff:

−c ≤ δ

1− δ{b Pr[v ≥ b] + c(1− Pr[v ≥ b])} ,

focussing on stationary equilibria, S would optimally choose b to solve

maxb(1− b)(b − c)

s.t.

ICSL : −c ≤ δ

1− δ{b Pr[v ≥ b] + c(1− Pr[v ≥ b])}

If δ is high ICSL does not bind and b = (1 + c)/2

On introducing Basu’s proposal Es report and this bad equilibriumdisappears

Proposal works well: corruption deterred, good; some licensesdelivered, good


Short-run S , long-run E ; c > 0

If E can commit, he could commit to refuse high bribes...

If bargaining power to E , relevant commitment equilibrium has

b = c + ε⇒ many but lower bribes

many more licenses issued (if v > c + ε)

Then the Basu proposal:

irrelevant if δ large enough

deters corruption but reduces licenses (more) if δ not large


Short-run S , long-run E ; c < 0

Perpetual play of no-bribes efficient one-shot equilibrium is theequilibrium

E not interested in committing to any other behavior

Basu’s proposal is therefore redundant in this case.


Summing up

c > 0 (poor inst.) c < 0 (good inst.)One shot game +deterrence -efficiency irrelevant irrelevant

Long-run S +deterrence -efficiency +deterrence +efficiencyLong-run E +deterrence --efficiency irrelevant irrelevant


Dreze’s Criticism

1 What if law enforcement is also inefficient and corrupt as the rest ofthe bureaucracy?Reporting may bring “litigation costs, possible harassment and littlechance of getting justice” (Dreze 2011)

2 If there is a positive probability of being convicted for bribing in theabsence of a report and option (B,−R) still viable (e.g. for 1 above),then legalizing act of bribing may induce to pay bribes people thatwould otherwise be deterred

3 Legalizing bribe-giving might reduce the moral cost of paying bribes


Dreze’s Criticism 1a: Inefficient law enforcement

FIGURE 3: POOR LAW ENFORCEMENT

b-c

v-b

-c-2Fs

v-kC

-c-2Fs

v-C

-c-2Fs

v-kC

E B S

A+L

¬A+L

¬A¬L

v

-c

O

O

¬B

L

v

-c

O

O

¬L

¬R

¬R R

R

S

Suppose reporting leadsto legal/harassmentcosts C (possiblyreduced to kC , with0 < k < 1, if S alsoreports, i.e. admits to beguilty)

If C > b no incentives toreport, Basu’s proposal(always) ineffective

Special channelsrequired... rewardsprohibitively costly


Dreze’s Criticism 1b: Corrupt law enforcement

After the reporting stage, parties can offer bribes to affect court’sdecision

Bribe competition as an English auction

Court has a cost of lying π

E willing to pay up to b; S willing to pay up to 2FS + b.

S wins if offers π more than E

Basu proposal ineffective if 2FS > π, then S wins

Honest law enforcers (high π) essential... special task forces...


Dreze’s Criticism 2 and 3

FIGURE 4: MORAL COSTS + EXOGENOUS CONVICTION

b-c

v-b-αFe-M

b-c-Fs

v-b-Fe-M

b-c-Fs

v-b-Fe-M

b-c-Fs

v-b-Fe-M

E B S

A+L

¬A+L

¬A¬L

v

-c

O

O

¬B

L

v

-c

O

O

¬L

¬R

¬R R

R

S

Let 0 < α < 1 denotethe probability ofconviction withoutreports

Let M > 0 be the moralcost of bribe-giving

If α and M are highenough then E offers nobribe


Dreze’s Criticism 2 and 3 Cont’d

FIGURE 3: POOR LAW ENFORCEMENT

b-c

v-b

-c-2Fs

v-kC

-c-2Fs

v-C

-c-2Fs

v-kC

E B S

A+L

¬A+L

¬A¬L

v

-c

O

O

¬B

L

v

-c

O

O

¬L

¬R

¬R R

R

S

Basu rules a la Dreze:back to Figure 3

Basu’s proposal:α = FE = 0, M = 0

If C > b unique SPEbribe and noreporting, corruptionincreases...


A slightly modified proposal, like a leniency policy

FIGURE 5: LENIENCY

b-c

v-b-αFe-M

b-c-Fs

v-b-Fe-M

-c-2Fs

v-M-C

-c-2Fs

v-M-kC

E B S

A+L

¬A+L

¬A¬L

v

-c

O

O

¬B

L

v

-c

O

O

¬L

¬R

¬R R

R

S

Analogousimmunity+briberestitution, but only if Ereports

E still liable if noreport (αFE > 0), noproblem 2

Still illegal to bribe(M > 0), no problem3

If C < b+ α× FE we getback deterrence!...but may have badproperties if lawenforcementinefficient/corrupt


Conclusions on harassment bribes

Dreze is right: can’t just introduce Basu’s proposal, details matter

Policy complementarites, i.e. Dreze is wrong: Basu’s proposal maywork if part of a reform package that reduce c and C and increase π

Leniency better if law enforcement works (α > 0) and honestindividuals (M > 0)

If law enforcement inefficient/corrupt (high C , low π) none works

⇒Start from law enforcers! Special courts, independent agencies,FBI, dedicated whistle-blower channels/agencies, protection... [cf.Anna Hazare’s proposal, Jhang model of governance]


More harmful corruption?

Q: How do our games change if bribes for illegal services thathurt others?

A: Not at all!

Strategic play unchanged! But:

licenses now harm (from society point-of-view)

c < 0 irrelevant (S hired to perform legal acts)


More harmful corruption? Cont’d

⇒ Drop two rightmost columns & poor vs good institutions (sign of c)

One shot +deterrence +efficiencyLong-run S +deterrence +efficiencyLong-run E +deterrence +efficiency

Unambiguously positive effects!Relevant to advanced countries as well


The End

Thank you for listening!



Basu proposal?

If E patient, can commit not to report:

Each S : If a bribe is offered, accept it and deliver the licence if in allprevious stage games the path of play was (B,AL, (−R,−R)), i.e. abribe was offered and accepted and a license issued and no playerreported this. In any other circumstance, do not accept the bribe anddo not deliver the licence.

E : Offer bribe (when v > b) and do not report after obtaining thelicence if in all previous stage games the path of play was(B,AL, (−R,−R)). In any other circumstance, do not offer a bribe.

S has no incentive to unilaterally deviate, nor E iff:

b ≤ δ

1− δ

∫ 1

v=b(v − b)dv



Perpetual repetition of static eq (licensing-cond-on-bribe) remains therelevant SPE

Basu proposal?

Perpetual repetition of no-bribe-no-licensing one SPE, so if Eimpatient as in one-shot case, but...

If E patient, can commit not to report (strategies in backup)

E has no incentive to unilaterally deviate iff:

b ≤ δ

1− δ

∫ 1

v=b(v − b)dv


Short-run S , long-run E ; c > 0 Cont’d

Each S will set bribes to maximize revenue, b would optimally be chosento solve

maxb(1− b)(b − c)

s.t.

ICEL : b ≤ δ

1− δ

∫ 1

v=b(v − b)dv

If δ is low, ICEL binds and maximum bribe b < (1 + c)/2

Basu proposal tightens E ’s incentive constraint lowering b

more licences are delivered, very good (monopoly distortion reduced)

smaller bribes are paid more frequently, more or less bad?


legalizing bribes - world banksiteresources.worldbank.org/extlacofficeofce/resources/...motivation...

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