Sunday, May 29, 2011

Andrei Shleifer and Robert W. Vishny. 1993. Corruption

Andrei Shleifer and Robert W. Vishny. 1993. "Corruption." Quarterly Journal of Economics 108 (3): 599-617.
  • Corruption
    • Corruption is the sale by government officials of government property for personal gain.
    • Corruption without theft occurs when the government sets a price p for a good, such as a license, but the the official charges a price greater than p, turns over the official price to the government and keeps the excess.
    • Corruption with theft occurs when the official makes a sale for the good at any price and doesn't turn p over to the government.
  • Market forces at work
    • Profit maximizing incentives of government officials: those who would pay most to be an official get to be an official + those who can pay the most are those that can collect the most bribes = maximal bribes collected 
    • Buyers want to be more competitive in the market. When there is corruption without theft, buyers can reduce the cost of goods that officials sell through bribery.
  • Role of agency organization
    • If there is just one agency selling different complementary goods, a joint monopolist, then it can strategize so that the low price of one good spurs the demand for a complementary good. The agency extracts greater rents this way. 
    • When different agencies with different jurisdictions operate independently when selling complementary goods, each agency will sell its respective good at the monopoly price. The cost becomes exorbitant for the buyer who must buy all complementary goods in order to operate and fewer goods will be purchased in comparison to when there is a joint monopolist. 
    • When agencies have overlapping jurisdictions (redundancy), then there is competition and there will be minimal to no corruption because buyers can just find the agency that charges the lowest price. 
  • The role of secrecy in corruption
    • Agency efforts to avoid detection of its corruption and subsequent punishment causes corruption to be more distortionary than taxation. Government officials will use their power to induce substitution into the goods on which bribes can be more easily collected without detection, such as banning certain imports.
      • The menu of goods in available in a country is determined by corruption opportunities rather than tastes or technological needs.
    • A cap is put on the number of people who are involved in giving and receiving bribes in order to maintain secrecy, which contributes to a hostility to newcomers, which inhibits change and innovation. Economic growth suffers as a result.

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