persistence of corruption: some theoretical perspectives

World Development Vol. 34, No. 2, pp. 349–358, 2006� 2005 Elsevier Ltd. All rights reserved

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Persistence of Corruption:

Some Theoretical Perspectives

AJIT MISHRA *

University of Dundee, UK

Summary.— The paper examines how pervasive corruption can be persistent. Despite the presenceof anti-corruption measures and incentives, corruption has a strong tendency to persist. In the firstpart, we discuss how a high level of corruption or a low level of compliance can be an equilibriumoutcome. In such a case, corruption becomes the social norm. In the second part of the paper, weuse ides from evolutionary game theory to discuss how corrupt behavior can be immune to inter-ventions and it can sustain itself against different individual behavioral norms.
� 2005 Elsevier Ltd. All rights reserved.
Key words — corruption, incentives, persistence, evolution

* This paper was prepared for the symposium on ‘‘Re/

Constructing Corruption’’ held on May 1, 2003 in

University of East Anglia. I would like to thank Nick

Duncan and Indranil Dutta for making me write on this

topic. I would also like to acknowledge intellectual

debt to Kaushik Basu and Dilip Mookherjee for

many discussions on this and related topics. I have also

benefited immensely from comments by two anony-

mous referees. Final revision accepted: March 9, 2005.

1. INTRODUCTION

Is corruption simply a manifestation of de-viant behavior from the norm or is it the normitself? Corruption is commonly defined as‘‘behavior that deviates from formal duties be-cause of private gains.’’ Hence, the very defini-tion of corruption would suggest that corruptacts are deviations from implicit or explicitbehavioral norms (with or without legal andethical connotations). However, the widespreadnature of corruption in some societies indicatesthat corrupt behavior is the norm itself—de-spite the fact that it is inefficient and generallycondemned. In this paper, we try to examinethe various factors that contribute to the persis-tence of such behavior.Historically, many societies have endured

long periods of widespread corruption. Huang(1974) examines how corruption emerged inChina under the Ming dynasty in the 14th cen-tury and continued to spread during the Qingdynasty through to the 19th century. Therewere many attempts including large scale salaryreforms to curb corruption but corruption grewunabated. Similarly, Waquet (1991) discusseshow corrupt practices were widespread duringthe 17th century in Florence despite the pres-ence of fairly repressive anti-corruption lawsduring this period. Many contemporary socie-ties are also beset with similar problems. Inthe early 1960s, the Government of India

349

viewed corruption as a top priority and ap-pointed a high-powered committee to look intocorruption. The committee, chaired by San-thanam, made a detailed study and made anumber of recommendations. But the anti-corruption measures over the last decades havenot met with any success and corruption hasgrown.It is important to bear in mind that we are

concerned with persistence of widespread cor-ruption and not just the practice of corruption.The phenomenon of corruption is certainlyvery old. References to bribery and the punish-ments for bribery can be found in many ancientsources like The Code of Hammurabi, King ofBabylon (22nd century BC), The Eddict ofHarmhab, king of Egypt (14th century BC),and Kautilya’s Arthasastra (14th century BC).Corruption is as old as the notion of kingdomitself and a corruption-free society is akin toan ideal state. 1

350 WORLD DEVELOPMENT

There are various ways to approach the per-sistence issue. Some scholars would argue thatcorruption persists because of the functionalcharacteristics associated with it. Merton’s(1968) fascinating study of American machinepolitics clearly sets out this intellectual tradi-tion. Machine politics reached a peak at theturn of the century when corruption of variousforms thrived. However, there was no system-atic attempt to remove these because of the sev-eral latent functions they fulfilled. Even whenthere were serious attempts, as in the case ofWaquet’s study of Florence, ‘‘the laws were in-tended not only to control corruption but alsorender it tolerable.’’ While there might be somemerit in this view, we do not pursue it here. 2

One could also argue that corruption persistsbecause of inadequate initiatives and properincentives. Bureaucratic corruption can beattributed to lack of sufficient political willand likewise, political corruption can be attrib-uted to lack of adequate political competition.This is somewhat similar to the recent issue ofcorruption and competition. It is generally be-lieved that greater competition in the form ofprivatization and deregulation would lead tosubstantially lower levels of corruption. Butthe recent experience of many countries(including some of the transition countries)shows that this may not indeed be the case.Corruption seems to be on the rise despite largescale privatization and deregulations. One canargue, along the same lines, that the reformshave not been proper or adequate and the rightincentives are still not in place. 3 There may besome merit in this view, since some societies ororganizations have managed to control cor-ruption in a significant way. But it does notprovide adequate explanation and can betautological in many instances.In this paper, we consider two complemen-

tary approaches to the problem of corruption.First we show that pervasiveness of corruptioncontributes to its persistence in a significantway. When there are many corrupt individualsin the society, it becomes optimal to be corruptdespite the presence of anti-corruption policiesand incentives. This way corrupt behavior be-comes the equilibrium behavior or the socialnorm.This view is not new. Economists have shown

that endemic corruption can be viewed as anequilibrium outcome in models with multipleequilibria. It has been noted that different soci-eties with relatively same levels of development,judicial machinery, and politico-legal structures

can exhibit varying degrees of ‘‘illegal (pre)occupation’’ like corruption, tax evasion, andother regulatory non-compliance. The explana-tion for this observation is that different socie-ties can get caught in different equilibria. At ageneral level, this multiplicity arises due to var-ious forms of externality. For example, if peo-ple expect more people to be corrupt, then theexpected cost of being corrupt would be less(the probability of apprehension might be lowor even the social sanction against corruptioncould be low) leading to more people being cor-rupt. 4 Like all models of multiple equilibria,these models cannot explain why some getcaught in the bad equilibrium, but still aid toour understanding of the persistence of corrup-tion in some societies.We discuss a similar situation where both low

compliance and high compliance can be equi-librium outcomes. The novelty of the analysislies in the exact mechanism which gives rise tothe multiplicity. Existing models of corruptiontend to focus primarily on the cost and benefitof non-compliance, but we also look at the costand benefit of compliance. It is often seen thatin many of the corrupt societies, those whocomply with the law or social standards oftenbecome victims of harassment, extortion, andalleged corrupt behavior. This means that theincentive to remain compliant declines leadingto rise in the level of non-compliance. We areable to highlight the importance of several fac-tors like the nature of information technology,the effectiveness of judicial redress, and compli-ance costs. We discuss how and when societiescan avoid the low-compliance equilibrium.But guaranteeing these conditions become diffi-cult when there is widespread corruption.The second approach focuses on individual

norms of behavior. The previous approachwould suggest that people tend to be corruptbecause there are many others who are corruptor ‘‘being corrupt’’ is the social norm. This isdifferent from saying that these individualswould be corrupt irrespective of the nature ofthe social surroundings. We wish to examinethe extent to which corruption as an individualnorm of behavior can sustain itself in the longrun. We introduce some preliminary ideas fromevolutionary game theory to discuss the persis-tence (and success) of these behavioral norms.It is shown that corrupt behavior can be self-sustaining and stable against other forms ofbehavior. Roughly speaking, this would meanthat in the long run only corrupt people wouldsurvive in a population of corrupt and honest

PERSISTENCE OF CORRUPTION 351

people. This is derived in a simple stylizedmodel but it suggests that we should be askingthe question ‘‘why don’t we see corrupt behav-ior everywhere?’’ rather than the question ‘‘whydo we see so much corruption?’’ This suggeststhat societies have over time tried to curb cor-rupt behavior in various ways and many ofthem would have to do with development ofindividual and social values.The plan of the paper is as follows. In Section

2 we discuss how low compliance can be anequilibrium outcome. We present a modelwhich admits two equilibria for certain param-eter values. Section 3 discusses the evolutionarymodel of corrupt behavior. Section 4 concludeswith a few comments.

2. CORRUPTION AND SOCIAL NORMS

We present a simple model of enforcement inthis section. It is shown that corruption ornon-compliant behavior can be the equilibriumoutcome in some cases. In these situations,corruption is the norm rather than deviantbehavior. For easy reading, we have omittedmost of the technical aspects of the model. Itis a general analysis of compliance—corruptionbeing one such application. In the later sub-section, we discuss how the ideas can be appliedin an organizational context as well.

(a) Multiple equilibria

Consider a group of firms facing a certainpollution standard. 5 A firm can choosewhether to comply with the prescribed standardor not. The gain from non-compliance g differsacross firms and is distributed according tosome distribution F(g). It can be interpretedas abatement cost savings to the firm; hence,different abatement technologies would accountfor the difference in gains. Firms compare theexpected cost of non-compliance with this gainwhile making their decisions. We shall assumethat there is a regulatory body in place toenforce the pollution standard (assumed to bezero for convenience). Each firm expects to beinspected with a certain probability q by an offi-cer. The officer can report the firm to the courtor the higher authority as a polluter. We as-sume the court’s technology to be perfect sothat the firm’s pollution level is revealed inthe court with certainty. A firm found guiltyby the court is charged a fine f and the officerreceives a reward r. In the absence of any re-

ward, the polluting firm can always bribe theofficer and escape the stipulated fine. This doesnot mean that any reward will ensure honestreporting. But it can still act as deterrence sincein most situations the bribe payments by thefirm will be an increasing function of both thefine f and reward r. Let b(f, r) be the bribeamount that the polluting firm (upon discov-ery) has to pay to the officer to escape report-ing. If bribery is not feasible, a firm with gaing will engage in pollution if and only ifg > qf. On the other hand, if bribery is feasible,a firm with gain g will pollute if and only ifg > qb(f, r). This resembles the standard in-centive mechanism that would be suggested toensure honest reporting by the officer andcompliance by the firm.We shall be looking at a case where informa-

tion is soft. Soft information refers to a situa-tion where information can be manipulatedeasily. Hard information, on the other hand,can be suppressed but not manipulated. 6 Inthe present case, hard information would implythat the officer after detecting evidence of pollu-tion can suppress it and report lack of sufficientevidence. But the officer cannot distort it andreport a polluting firm as non-polluting. Theanalysis of enforcement when information issoft has attracted attention recently. 7 The nat-ure of soft information implies that the officercan report a non-polluting firm as well. In thatcase, the firm is eventually acquitted by thecourt, but it incurs a cost c. To discourage theofficer from such misreporting, we suppose thatthe officer, in such cases, incurs a cost d. Notethat if the officer knows that the firm is non-polluting, then any positive d will be sufficientto stop such over-reporting. We shall assumethat d is bounded above by some value D. Ahigh value of d would mean that the officerwould not report a firm whenever he has slight-est doubt about the firm’s pollution level. Wewant to avoid such situations and assume thatd is not very large. The exact nature of thisupper bound will be discussed later. The rewardand penalty structure is given and satisfies thefollowing assumption:

r < f ; c < f ; and d < D.

Inspection in itself does not reveal anything,it all depends on whether the officer has putin the necessary effort or not. Effort can begiven a very broad interpretation to includeinvestments by the officer in learning, humancapital development, or skill acquisition. It is


a measure of the competence of the officer.Competence may have several connotations,but in our model context it implies that a com-petent officer is able to differentiate the pollut-ing firms from the non-polluting firms uponinspection. 8 To avoid confusion, such officers(who have put in the required effort) will becalled informed. We also assume that firmscan observe the level of e chosen by the offi-cer. 9 This is however non-verifiable, and hencenon-contractible. So the authority cannot forcethe officer to choose a particular level of e.We can summarize the situation as a two

stage process. In the first stage, each firmchooses whether to pollute (p) or not (np). Itsdecision is given by a where a 2 {p,np}. Theofficer chooses effort e, e 2 {0, 1}. Effort iscostly, whenever e = 1, it costs the officer anamount E. The second stage is a simple bribegame. If the firm and the officer agree on abribe (including a bribe of zero), the firm isnot reported. Otherwise, the firm is reported.The firms and the officer work out the expectedpayoffs in this stage while making decisions inthe first stage.Firm’s gain g is not observable to anyone

other than the firm, though the distribution isknown to all. Neither the officer nor the otherfirms can observe a particular firm’s choice ofa. As discussed earlier, a firm will choose topollute if and only if its private gain g exceedssome threshold level g�. This threshold levelwill depend on the officer’s choice of effortand the nature of the bribe game. The fractionof non-polluting firms will be given byp = F(g�). The officer has some belief aboutthe level of g� and consequently p. The officer’schoice of effort and reporting strategy would bea function of this level of g�. In equilibrium,this level turns out to be the actual level andthe strategies chosen by the officer and the firmsare optimal. 10

We shall skip the analysis concerning the ac-tual bribing process. 11 Note that we can havetwo types of situations. Depending on thechoice of the officer, the firms might be facingan informed or uniformed officer. Whenever,e = 1, the firm faces an informed officer whoknows the pollution level of the firm. It seemsreasonable to suppose that the non-pollutingfirms would prefer an informed officer to anuninformed one. The exact opposite preferenceis expected for the polluting firms. In fact,under some conditions it does turn out to bethe case. The informed officer would never liketo report the non-polluting firm because of the

cost d. But with an uninformed officer, the non-polluting firm gets reported with positive prob-ability (it is increasing in the reward r) and willincur some cost. Let the expected payments bythe firm from choosing a be U(a), a = p, np. Afirm with private gain g will choose to pollute(a = p) if and only if g > U(p) �U(np). As the previous discussion suggeststhe expected payment will depend on the offi-cer’s choice of effort. UI(a) and UUI(a) denotethe expected payments under the informedand uninformed cases, respectively. Hence,depending on the effort choice of the officerwe can have two threshold values g�I and g�UI .It is clear that g�UI < g�I since

UIðnpÞ > UUIðnpÞ and UIðpÞ 6 UUIðpÞ.

Hence, when the officer is uninformed, evenfirms with lower gain g will choose to pollute.For the officer, let his payoffs from the bribe

game be VI and VUI in the informed and uni-formed cases, respectively. The difference willdepend on the belief p and information cost E(in addition to the incentive parameters r, f,and d). For a given E, it can be shown thatVI > VUI and the officer will choose to be in-formed (e = 1) if p is relatively high. 12

When the officer is expected to be unin-formed, more firms would choose to be onthe wrong side of the law than when the officeris informed. This, in turn, can make the officer’sdecision to choose e = 0 optimal. So we mightsee a greater degree of violations of law withan uninformed officer. Similarly, when firmsexpect the officer to be informed, fewer firmswould choose to pollute and p is likely to behigh and this, in turn, makes the officer’s deci-sion to choose e = 1 an optimal one. Thiswould suggest that for certain parametervalues, there exist two equilibria. There is ahigh-compliance equilibrium with fewer firmschoosing to pollute (p is high) and the officerremains informed. The other is the low-compli-ance equilibrium where the officer is unin-formed and a greater fraction of the firmschooses to pollute.

(b) An example

To fix ideas, consider the following simpleexample. Suppose there are only four types offirms; g 2 {5, 10, 15, 25}. Each type is equallylikely. Each firm is going to be inspected withprobability 1/2 by a corruptible inspector. Apolluting firm faces a penalty of 50 if reported.


For limited liability reasons, this is the maxi-mum penalty that can be imposed. A non-pol-luting firm will not have to pay this penaltybut will have to incur a cost of 30 if reported.We assume that the inspector has a highcommission rate and gets 48 as reward if thereported firm is found to have polluted.However, in the absence of any mechanism todiscover bribery, this does not guarantee honestreporting. But this means that the minimumbribe that a polluting firm can offer is 48. Thisin itself will act as deterrence. The cost of beinginformed E is 9 and the penalty for over-report-ing is 20. Now we can have a situation wherethe officer chooses e = 0 and reports the firmwith probability one unless the firm offers abribe of 48 or more. 13 This means the pollutingfirm can get away by paying a bribe of 48;hence, their expected cost from non-complianceis 24. The non-polluting firms also have an ex-pected cost of 15. All firms with gains exceeding9 will choose to pollute. Hence, 75% of all firmswill pollute. Given that only a quarter of thefirms choose to comply, the officer’s expectedcost from reporting is 20/4 which is less thanthe cost of being informed. On the other hand,we can also have a situation where e = 1 andonly 25% of all firms choose to pollute. Giventhat there are many non-polluting firms the offi-cer will prefer to be informed. The expectedcost of reporting a firm without being informedis 15, which is higher than the cost of being in-formed.The above analysis does not apply to the case

of hard information because the officer cannotreport anyone without hard evidence. 14 Thiswould require choosing e = 1 or being in-formed. The officer’s choice of e = 0 wouldfetch zero payoff. On the other hand, a choiceof e = 1 would fetch a net expected payoff ofthree. Hence, the only equilibrium outcomewould be the high-compliance outcome.Similarly, a lower value of c would mean that

judicial remedies are not very costly and theincentive to remain compliant would be high.It can be checked that if c 6 26, the officer willalways choose e = 1. When e = 0, any firmwith a gain exceeding 11 will choose to pollute(it can be checked that the officer still followsthe strategy of reporting a firm unless offereda bribe of 48). That means half the firms wouldbe polluting. But this would make the expectedcost of reporting a firm without being informedhigh compared to the cost of being informed.Hence, the low-compliance outcome is not anequilibrium outcome. This would also be the

case for lower values of E and higher valuesof d. If the cost of being informed is low, sayE 6 5, then in the original example the onlyequilibrium outcome would be the high-compli-ance outcome. Similar arguments apply whenpenalty for over-reporting is high; d P 40.The officer would always prefer to be informedto avoid the cost of wrongly reporting a non-polluting firm.The preceding exercises suggest that the low-

compliance outcome can be affected by suitablechoice of c, E, and d. However, the social plan-ner might have limited control over these vari-ables. For example, while in principle it ispossible to choose a high d, such a high penaltyis unlikely to be seen in practice if the verifica-tion technology is not perfect. In that case evenan honest and informed inspector might not beinterested in reporting which would defeat thepurpose of enforcement. Similarly, E might bedetermined to a large extent by the availabletechnological capabilities and practice. Regard-ing the other remaining variable, it is alwaysoptimal to have a lower cost c. But if the higherauthority or the court also has corrupt agentswho would like a share in the rent, this cost islikely to be higher and not lower. In a situationof pervasive corruption, this is the most likelyoutcome.

(c) Corruption in organizations

The above analysis can be applied to hierar-chical organizations to explain why corruptionmight spread within an organization. Considera group of officers being monitored by dishon-est superior officers. If honest officers find thatthey are not free from charges of bribery andcorruption and corrupt officers find that theycan avoid penalty by bribing the superior, weare likely to see depletion in the bench of honestofficers. It creates an atmosphere of mistrustand every one is believed to be corrupt whichprompts many individuals to be actually cor-rupt. 15

The role of a dishonest superior is quiteimportant in this context. 16 As we saw in ourearlier discussion, low-compliance outcome isunlikely in the case of the honest officer (supe-rior officer). However, dishonest superiors canalso be viewed as a consequence of pervasivecorruption. We can consider a dynamic versionof the model and assume that an officer getspromoted to be a superior officer with someprobability. If there are many corrupt officers,then the probability that the superior officer


would be also corrupt is high. A corrupt supe-rior in turn would induce corrupt behavior byother officers. This way pervasive corruptionwould sustain itself.

3. CORRUPTION AND EVOLUTIONARYDYNAMICS

In this section, we look at some of the ideasfrom evolutionary theories to see whether thepersistence issue can be addressed in such aframework. There are at least three motivationsfor focusing on an evolutionary approach.First, recent work on evolutionary game theoryhas shown that evolutionary stability can ad-dress the issue of equilibrium selection to someextent. Since corruption happens in one suchequilibrium, we can ask what kind of socialdynamics would select such an outcome (equi-librium). Second, we also need to look at indi-vidual norms of behavior and not just socialnorms. 17 The analysis of the previous sectionshowed that we could have different compliancelevels as different equilibria or (social) norms.But then these do not explain the presence ofcertain social norms. In the present section,we shall be primarily concerned with individualnorms of behavior. Last, we want to seewhether corruption persists because of imper-fect information, underlying beliefs, and theease of collusion or it persists because corrup-tion has a self-replicating nature in a very basicand primitive way. Suppose we have a set ofhonest (non-corrupt) individuals. Clearly, theanalysis of Section 2 would suggest that therecannot be any corruption in equilibrium. Sup-pose we introduce some corrupt individualsinto this population. Do we still have the equi-librium with no corruption? This question is atthe heart of evolutionary game theory. 18

(a) Evolutionary stability

Suppose individuals are programmed to playcertain strategies (act in certain manner) insome strategic situation under consideration.Unlike standard decision theory or game the-ory, there are no rational calculations involved.We consider a case where a large popula-tion plays the following symmetric three-persondistribution game. 19 We shall assume that oneunit of resource is to be distributed betweenthree randomly matched individuals. Individu-als are either collusive (C) or non-collusive

(H). Alternatively, C stands for corrupt behav-ior. A collusive individual always colludes withsimilar agents to further his or her share in thedistribution process. On the other hand, a non-collusive individual never colludes (this repre-sents honest behavior). Players meet randomlyand play the game. Each individual has an out-side option—not to participate in the game andreceive z, z P 0, and small.One can use various modeling strategies to

analyze the payoffs from this distribution game.We could model the situation as a strategic bar-gaining process with disagreement leading topayoff of zero for everyone. Alternatively, wecould assume that with equal probability oneperson is authorized to distribute the resource.Rather than describe the details of the distribu-tion process we shall suppose that the followingoutcomes (payoff distributions) result whendifferent C or H types are matched. We shalldenote the payoff to strategy X when it ismatched with Y and Z as g(X,Y,Z).

—(H,H,H): When three H types arematched, each gets an equal share andg(H,H,H) = 1/3.—(H,H,C): Again each gets 1/3. The pres-ence of one C does not make a differencebecause C cannot collude with anyone.—(H,C,C): H gets z, and C gets (1 � z)/2since the two C types collude. Hence,g(H;C,C) = z and g(C;C,H) = (1 � z)/2.—(C,C,C): Each gets (1 � d)/3. Thisreflects the fact that collusion formation iscompetitive and wasteful here, d > 0.

Definition. Let A be the set of pure strategiesand S be the set of mixed strategies. A strategyX is evolutionary stable (ESS) if there exists d*such that for all d 2 (0 d*] and for all Y

gðX ; ð1� dÞX þ dY Þ > gðY ; ð1� dÞX þ dY Þ.

This captures the basic idea that if everyone inthe population plays X and there is a smallinvasion of mutants (playing Y), then popula-tion of X is immune to such invasion. In biolog-ical contexts, payoffs represent fitness andability to replicate. In the above definition, Xis an evolutionary stable strategy because thepayoff from playing X in a population whereeveryone plays X except a small (d) fractionof mutants is higher. Since the mutants donot do very well (payoff is smaller), they arenot able to replicate and overrun the X popula-tion. In our case, replication can be interpreted


as imitation or adoption of the successful strat-egies. So we could think of a scenario whereindividuals look at their own payoff as wellthe payoffs of other individuals. Individualscan switch to some other strategy which givesa higher payoff. This way a successful strategygets replicated. This is called the replicationor imitation dynamics.
In the present context, we have assumed that
success is measured purely in terms of mone-tary payoffs. This is where the social value sys-tem comes into play. It is quite possible thatindividuals might continue with their honeststrategy despite the corrupt strategy yieldinghigher economic payoff. The latter might yieldless prestige or social esteem. Clearly the under-lying value system is a major determinant of theimitation dynamics. 20

For the three-person case, we can reinterpretg(X, (1 � d)X + dY) as payoff to X when allother opponents are playing a mixed strategywith randomization probabilities given by(1 � d) and d. It can be shown that the non-col-lusive strategy H is an ESS if d(d/3) + z � 1/3 > 0. 21 This inequality is not likely to be sat-isfied, and hence, H is not immune to invasionby C. On the other hand, C is an ESS if(1 � d)2[(1 � d)/3 � z] + 2(1 � d)d[(1 � z)/2 �1/3] > 0. This is likely to be true. Clearly collu-sive behavior is immune to the invasion by H (afew good individuals cannot help!). This wouldsuggest that corruption is not a deviation but itis the norm itself. However, it is easy to checkthat it is an inefficient situation. Societies whichcan establish H behavior as the norm would domuch better.

(b) Extensions

We have assumed that collusion formation isinstantaneous and costless, but collusion for-mation is likely to be a costly process. More-over different societies and cultures will havedifferent costs. When and how people can col-lude depends on a variety of factors. First, col-lusion might be difficult if there is sufficientinformational asymmetry between the collud-ing parties. 22 Second, collusion in most in-stances involves bribery and by its very naturea bribe transaction is a personalized transac-tion. 23 Hence, customs, practices, and atti-tudes also determine the environment inwhich collusion takes place. These are similar towhat Rose-Ackerman (1999) calls ‘‘culturalfactors’’ affecting corruption. 24

We can extend the previous analysis in a fewdirections. First, recall that we have a static dis-tribution game. Consider a situation whereagents have to invest some effort in the produc-tion of the output before distribution. In thatcase, one can devote effort to forming collusionor to raising output. This would make the costof collusion very high (high d) because collusivebehavior implies lost growth opportunities. Insuch a case, a population of C types wouldrather do badly. This suggests that the processof development itself can bring about changesin whether corruption can persist or not. Sec-ond, in a similar vein, one could ask what wouldlead to high values of z, the outside option. Ahigh z would imply that the H type’s share doesnot depend so much on the nature of matchedopponents. This suggests that more market ori-ented societies would be better suited to sustainnon-collusive behavior over the long run.A third way would be to consider sets of

behavior rules and not just one. 25 For exam-ple, the H type could imply a collection ofbehavior—never collude and always divideequally, leave the game rather than accept any-thing that is not fair. Now when the H typemeets two of the C types, the H type couldleave the game resulting in payoffs of z to every-one. This may not be a gain to the H type, butthe mutant C types are not going to do verywell. Given that they do not do very wellagainst their own types, they will not be ableto replicate. Hence, the H type could be im-mune to invasion by the C types. A societydevelops (has to develop) such behavioral rulesand norms over time to sustain the honest andmore efficient mode of behavior.

4. CONCLUSION

The aim of the paper is rather modest. Thepaper discusses two different approaches tostudy the issue of persistence. In the first case,using a static framework, it is shown how per-vasive corruption becomes the social norm. Inthe second case, we have shown how corruptbehavior by individuals can survive and suc-ceed in the long run in an evolutionary setting.The first half of the paper shows that it is

possible to have a situation of low-complianceand pervasive corruption as an equilibrium out-come. If individuals expect to bear substantialcost from compliance and hope to get awaycheaply by non-compliance, then the society is


driven toward the equilibrium with very lowlevels of compliance. In such a situation, thereis a general belief in the society that everybodyengages in non-compliant behavior. This beliefbecomes self-fulfilling. In addition to the stan-dard incentive structure, one has to addressthe issues of information technology, harass-ment, and redress to get rid of the low-compli-ance outcome.

The second half of the paper has been ratherexploratory. We have tried to pose the persis-tence of corruption issue in an evolutionary set-ting. This provides us with a framework inwhich we can analyze how non-corrupt behav-ior can survive over the long run. The analysishas been somewhat speculative and rudimen-tary, a detailed development is left for futureresearch.

NOTES

1. Moreover, it might be optimal to tolerate someamount of corruption.

2. This view is shared by many who view corruption asnecessary to ‘‘grease the wheels of commerce.’’ SeeMishra (2005a) for an appraisal of this viewpoint.

3. See Dutta and Mishra (2003) for the references andan extended discussion of this issue.

4. Andvig and Moene (1990) showed how ‘‘corruptionmay corrupt’’ others and lead to a situation ofwidespread corruption. Likewise, Lui (1986), Sah(1991), and Tirole (1996) focus on this multiple equilib-ria phenomenon to throw light on the persistence ofcrime and corruption. See also the survey by Bardhan(1997).

5. We could reinterpret the situation as corruptiondeterrence, where the officer is to be monitored by otherofficers. In the present section, we make no distinctionbetween corruption and any other criminal activity.

6. See Tirole (1992) for a discussion on the implicationsof this.

7. This gives rise to extortion possibilities. See Polinskyand Shavell (2001), Hindriks, Keen, and Muthoo (1999),and Mishra (2005b).

8. To give an example, tax inspectors often spendconsiderable time and effort researching on related areasbefore they do the true assessments.

9. Strictly speaking this assumption can be avoided.The firms can form belief about e in the first stage and inequilibrium this belief is justified. But one has to restrictthese beliefs to end points only and all firms have samebeliefs.

10. Alternatively, we can suppose that the officerobserves some imperfect aggregate signal (total pollutionor past pollution levels) and infers about the level of g�.Collective reputation, such as an aggregate imperfectmeasure, plays an important role in Tirole (1996).

11. Mishra (1998) contains a discussion of similar bribegames.

12. When p is high, the officer expects to incur the cost(d) with greater probability and would rather choose tobe informed.

13. The actual outcome is a bit more complicated. Thenon-polluting firm does not offer any bribe, and thepolluting firm randomizes between offering nothing and48. Whenever zero bribe is offered, the officer reportswith probability 48/50. So the non-polluting firm’sexpected cost is slightly lower than 15.

14. This result would also be obtained when the officeris honest. In that case, honest reporting is possible onlywhen e = 1. The honest officer would choose e = 1 andwould always report the polluting firms irrespective ofthe rewards, provided his net payoff from doing so ispositive.

15. Myrdal (1968) narrates an interesting case wherethe honest policeman would not approach the taxi driverfor traffic violation because the driver would complainof harassment and extortion which will be readilybelieved even if the policeman had no such intention.

16. Much of the corruption literature normally as-sumes that there is an honest agency which is supposedto enforce the penalties and rewards stipulated by theincentive structure. However, there are some attempts tosee how a single corrupt act is likely to be backed by thepossibility of several layers of collusion. See Basu,Bhattacharya, and Mishra (1992), Bac (1996), Carrilo(1995), and Mishra (2002).


17. ‘‘Flashing headlights to let another vehicle pass’’ ispart of a social norm and drivers may not follow it in allsocieties in the same way. But ‘‘driving carefully whenpeople are crossing the road’’ is a norm which the drivermay follow irrespective of the society he lives in.

18. Pioneering work by biologists Maynard Smith andPrice (1973) has led to a substantial literature. Seesurveys by Kandori (1996), Vega-Redondo (1996), andWeibull (1995).

19. It is normal to compare strategies in a pairwisefashion; hence, it is normal to consider two-persongames. Here also we shall compare two strategies but tomotivate the idea of collusion/corruption we are usingan example of three-person matching.

20. This can be related to Huntington’s modernizationand corruption hypothesis (1968). Modernization bringsa different social dynamics to an otherwise traditionalsociety.

21. It follows from (1 � d)2g(H,H,H) + 2(1 � d)dg(H,H, C) + d2g(H, C, C) > (1 � d)2g(C,H,H) +2(1 � d)dg(C,H,C) + d2g(C,C,C).

22. This is of relevance in designing the delivery modeof public services. For example, in the context of

decentralization of public service delivery, Bardhanand Mookherjee (2000) argue that such collusionformation (capture) is easier at the local level becauseof familiarity and lack of information asymmetries. Thisalso has a bearing on the placement and transfer policyof personnel in many public offices.

23. Anthropologists would argue that the ‘‘self’’ isinvolved in such transactions. Market transactions areatomistic and does not involve the individual self(characteristics and attributes).

24. In some societies, even the so-called market trans-actions are not necessarily impersonal. One could citeseveral examples. One frequents a shop not because ofany obvious clientele benefits but because of personallinks. Similarly, it is often reported that people mightvote for someone because he or she had visited them inthe past—akin to pretence of personal knowledge. AsBasu (2000) points out, in India, you have the right toask a stranger traveling with you about various personaldetails like age, salary, family life, etc., because getting toknow the person is a done thing. In many other societiesit would be considered rude.

25. This is similar to the analysis of ‘‘rationalitylimiting norms’’ in Basu (2000).

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persistence of corruption: some theoretical perspectives

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