Underdevelopment and the Economics of Corruption: a Game
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World Development,Vol. 10, No. 8, pp. 677-687, 1982. 0305-750X/82/080677-1 1$03.00/O Printed in Great Britain. o 1982 Pergamon Press Ltd. Underdevelopmentand the Economics of Corruption: A Game Theory Approach JOHN MACRAE” Summary. - Previous attempts to treat corruption arc surveyed critically. A game theory approach is preferred on the grounds that it can most cffcctivcly explain the basis for decisions of reasonable men to bc corrupt. A simple model is presented showing how bribery might be a dominant strategy. A prisoner’s dilemma type of situation emerges with the added complication that the judge and jailer may be corrupt. Other conclusions arc that one official will not accept bribes from more than one firm. It is impossible to predict which firm will win the contract. No obvious solution emerges and legal remedies are discounted. This paper then reviews the principal gcncral equilibrium effects and concludes that their likely effect on economic dcvclop- ment is negative. Although, as we shall see, economists and 1. 1NTRODUCTION political scientists are divided over the overall influence of corruption on economic growth or The debate on the topic of corruption and development, political events speak more underdevelopment, in which Myrdal’s (1968, clearly. Corruption has been the principal argu- 1970) classic contributions stood virtually ment used by the leaders of the recent coup unchallenged for a decade, has now shown d’etat in Liberia to justify the overthrow of the signs of being reopened. Recent contributions regime of President Tolbert. In Syria many of include empirical analyses (Sarrassoro, 1980) the top Ministers were recently ousted as part and theoretical discussions based on a utility of an intensive campaign against graft and maximizing under uncertainty methodology corruption. Lack of serious analysis of the (Rose-Ackerman, 1975; Beenstock, 1979). The issues involved and of basic hard facts has also present article attempts to contribute to the led to remedies which, to many, appear worse debate at a methodological level. In particular it than the disease. The main elements of the proposes the thesis that if one is interested in Syrian solution are to raise the salaries of State answering the question, what is the basis for servants and army officers by 50-10070 and to decisions of reasonable men to be corrupt, try to seek out political leaders whose leading then a game theory approach would seem to attribute is that they are sufficiently rich so as provide a useful methodology. We argue that to avoid being tempted by the opportunities to game theory can enable progress to be made turn aside public funds for private purposes where utility maximization falters and that (Le Monde, 16 January 1980). useful conclusions can be derived from a These are only two recent entries in a long minimum of assumptions. list of concrete examples where the topic to That serious discussion of the influence of be discussed reveals itself to be of prime corruption on economic development is long importance for the development prospects of overdue scarcely needs repeating. For develop- much of the Third World today. Given the ing countries, the object of the analysis here, complex and wide-ranging influence of corrup- corruption is of growing rather than declining tion on the allocation of resources, we have importance. Myrdal (1968) makes the point limited the discussion to a number of precise that practically everything that has happened in questions to be treated analytically. In particu- the post-Independence era in South-east Asia lar, we shall be concerned with bribing by has raised the incentive and opportunity for corruption. Recent surveys of selected African countries have confirmed its grip of the public * Independent Development Consultant, Paris. I am sector and noted its increase in importance as grateful to the journal for the valuable comments of the general level of economic development rises the anonymous rcfcrees on an earlier draft of this (Sarrassoro, 19 80). paper. 671 678 WOKLO L)L:VI~l.Ol’hll~N I oligopolistic firms or their agents in the context corruption, it contradicts the views of those of contract tendering. In Section 2, we present who consider it solely as a cost incurred b> our definition and a brief critical survey of pre- capital-rich countries in their lending to capital- vious methodological approaches. This leads us poor ones4 If the arrangement results in firms to prefer a game theory approach which is or nationals of capital-rich countries gaining employed in Section 3 to answer the following projects or positions in capital-poor ones, is it questions. (1) Do all firms, or only some, have not more in the nature of an investment yield- an interest in being corrupt? (2) What role do ing recurring benefits, rather than a cost, that assumptions about rival behaviour play in this the arrangement ought to be considered? decision? (3) Is there any limit on the amount The evident similarity between official of corruption that can exist? Can bribes be market exchange and the ‘shadow’ market for extorted from everyone? What provides such arrangements has been accepted by some limits? (4) What is the likely role of legal sanc- authors of the ‘political science school’ as the tions in discouraging corruption. In Section 4, basis for an argument that such ‘open’ corrup- we bring out some of the important general tion is an optimal means of bypassing burrau- equilibrium effects such as the influence on cratic inertia and is even conducive to economic technology choice, the composition of produc- growth.” There are two critical points which tion and the distribution of income. can he made about this form of analysis, First. it is based on a false analogy. the sinrilarity between the official and unofficial markets is in 2. CORRUPTION: DEFINITION AND fact more apparent than real. Second, the con SURVEY OF METHODOLOGIES elusion suffers from the fallacy of composition. Regarding the first point. there are at least To avoid the moralistic overtones associated three factors which dominate the market for with the term ‘corruption’, we shall use the arrangements but which are absent from a corn- term ‘arrangement’ whenever possible to define petitive official market (we treat imperfect the object of our analysis. An arrangement is a markets later). First, whereas the competitive private exchange between two parties (the market is based on full information to compet- ‘demander’ and the ‘supplier’) which: (1) has an ing parties, the market in arrangements is based influence on the allocation of resources either on secrecy, i.e. the segmentation of information immediately or in the future, and (2) involves amongst different parties. Second, there is the the use or abuse of public or collective responsi- importance of rival behaviour. In the market bility for private ends.’ Whilst conclusion of an for arrangements there will be no ‘bidding’ pro- arrangement implies the expectation of a net cess for if all are bidding then they will cancel gain for both parties, the form of the gain varies each other out (Section 3). Last, there is the considerably as do the circumstances of the heavy element of both risk. for instance of dis- negotiation. If the most common form is prob- covery, and uncertainty as to the final outcome ably monetary as a result of an arrangement associated with an arrangement. In a competitive contracted between private individual and market, e.v post, there is no uncertainty as to public official, the payment for, or counterpart the outcome, hut in the case of arrangements of, the arrangement may be political patronage, this uncertainty will always exist for there is no tutelage or some other type of harter.z guarantee that the arrangement will ‘work’: there are other uncontrolled factors at work. The treatment of risk has been at the centre of (a) Traditional views and false analogies recent economic theories of corruption [see The basic assumption adopted by this Section 2(b)]. definition, and running through the models to It is the need of authority, in its thousand be outlined later, is that corruption is part of a and one forms, to vet or decide over the con- rational calculus and an integral and often ditions under which economic activity can be deeply-rooted method by which reasonable undertaken, that confers on the official what men take decisions in the soft-states of the Beenstock (1979, p. 16) describes as ‘conferred Third World. It thereby opposes the view of monopoly status’. This situation implies an Myrdal who argues that it is in some way analogy with the imperfect market functioning opposed to the operation of the profit-motive, of traditional microeconomics, but this analogy being part of an amalgam of social attitudes is also debatable. Often the analysis is made which impede the introduction of natural that the arrangement price is like a tax which is decision-making along these lines into LDCS.~ passed on to the consumer with all the normal In stressing, also, the exchange nature of consequences such as changes in producers’ and UNDERDEVELOPMENTANDTHEECONOMlCSOI~CORRUPTION 679 consumers’ surpluses.6 But whether the arrange- ment is concluded ; (2) the degree of risk associ- ment cost will be passed on will depend on, ated with the contracting of the arrangement amongst other things, the assumptions made and the attitude towards risk taking; (3) what about rival behaviour by the party seeking the rivals are prepared to offer for their parts; and arrangement. Arrangements, in the context of (4) official settlement costs, i.e. the level of contract negotiations for important ‘one-off’ fines etc. We shall concentrate first on factor projects in LDCs are more a reflection of the (2).