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TRANSCRIPT
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...
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 2 / 1
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)
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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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 4 / 1
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)
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 5 / 1
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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 6 / 1
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
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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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 8 / 1
The Game Tree
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 9 / 1
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
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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?
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 11 / 1
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
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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
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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
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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
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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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 16 / 1
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
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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
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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’)
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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
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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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 21 / 1
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.
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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
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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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 24 / 1
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
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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...
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 26 / 1
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
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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...
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 28 / 1
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
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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]
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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)
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 31 / 1
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
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The End
Thank you for listening!
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Short-run S , long-run E ; c > 0
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
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Short-run S , long-run E ; c > 0
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
Giancarlo Spagnolo (SITE - SSE) Legalizing Bribes World Bank, April 3, 2012 35 / 1
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?
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