The Many Faces of Corruption

1. The Many Faces of Corruption Ajit Mishra BRLSI 9 October 2018

2. Kautilya .. • Just as it is impossible not to taste honey or poison that one may find at the tip of one’s tongue, so it is impossible for one dealing with government funds not to taste, at least a little bit, of the King’s wealth. Book 2, Chapter 9, Verse 32 • Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money. Book 2, Chapter 9, Verse 33 • It is possible to know even the path of birds flying in the sky but not the ways of government servants who hide their [dishonest] income. 2.9.34 • Kautilya (200 BCE?): The Arthashashtra, (edited, rearranged and translated by Rangarajan, L.N., 1987, Penguin Classics, New Delhi.

3. Now • Corruption is at the heart of so many of the world’s problems. We must overcome it, if our efforts to end poverty, promote prosperity and defeat terrorism and extremism are to succeed. Global Declaration Against Corruption, 2016, London

4. Now… • World Bank Anti-corruption Brief (2016) photocredit:Futureatlas.com • IMF Staff note puts the extent of bribery at 2-3% of World GDP photo credit: futureatlas.com

5. Common types • In 2005, in a survey conducted in Bangladesh, two-thirds of the 18.8 percent of respondents who had used the courts, had paid an average bribe of TK 7,370 ( 25% of annual income) Global Corruption Report 2007, TI • In Paraguay, the poor pay 12.6 percent of their income to bribes while high-income households pay 6.4 percent. http://www.worldbank.org/en/topic/governance/brief/anti-corruption • Almost every focus group notes that medical attention at public hospitals and health units can only be obtained in exchange for payment despite the official abolition of user fees at health units Hunt, JHE 2010

6. Big scams • Some of these mega corruption scandals are Coal Allotment Scam (186000 Crores, £19.16 billion), 2 G Spectrum Scam (176000 Crores), CWG Scam (70000 Crores), Housing Scam (190000 Crores) and Fodder Scam (950 Crores), and the list can go on. • President of Zaire, Mobutu Seko, looted the treasury of some $5 billion—an amount equal to the country’s entire external debt at the time he was ousted in 1997. • In the Goldenberg scam in Kenya in the early 1990s, the Goldenberg firm received as much as $1 billion from the government as part of an export compensation scheme for fictitious exports of commodities of which Kenya either produced little (gold) or nothing at all (diamonds)!

7. Corruption • Commonly defined as ‘abuse of public office for private gains’, corruption can take several forms • Corruption Prevention Acts also allow for several types • Empirically, all forms are measured by a single ‘perceived corruption’ measure • Corruption Perception Index (TI) • Control of Corruption Index (WBI) • More recently, firm level responses (WBES) • Other government effectiveness measures

8. Collusion and Extortion Collusion: Under-reporting of offenses in exchange for bribes Extortion: Bribes extracted against threat of over-reporting, or over-reporting Basic tension between these two: collusion control requires high powered incentives including privatized enforcement but these induce greater extortion

9. Collusion and Extortion • Some evidence to suggest that high-powered incentives could have resulted in extortion (Latin America Tax Reforms, Tax Farming) • Example: Firms choosing pollution levels, to meet some standard and face penalty for non-compliance. • Regulatory compliance is a function of both these forms of corruption • Higher extortion reduces compliance incentives • Greater scope of collusion makes non-compliance less costly • What is the optimal policy?

10. Embezzlement and Bribery From an official’s self-enrichment point of view, both are substitutes Both require costly monitoring by anti-corruption bureau and also involve high concealment costs by officials Embezzlement is ‘victimless’ (or appears to be)

11. Embezzlement • Consumption of public funds • Legal Daily estimate it to $143 billion in 2006, • Reinnika -Svensson missing funds in Uganda education programme to be as high as 85% • The contrast is quite strong in China (Ding, 2000) • Embezzlement is a ‘soft’ crime, treated mildly but bribery (especially extortion variety) is punished more often • Amounts involved in bribery, much smaller than most cases of embezzlement

12. Embezzlement • Leaders tolerate embezzlement to • (i) avoid costly concealment • (ii) costly crime-displacement • (iii) implement some form of efficiency wage (Fan- Treisman, 2010). This is more likely when detecting embezzlement is costly and bribe detection is effective

13. Bribery and Lobbying Substitutes or complements? Other forms of influence: Legal vs. Illegal Corruption ( Kaufman- Vicente 2011) Plata O Plomo (Dal Bo, Dal Bo, Di Tella, 2006)

14. Lobbying • Purely informational role vs influencing policy through bribes • Substitute for bribing public officials : change the law so that you don’t have to break the law (Harstad-Svensson, 2011) • Complement: lobbying for weaker law enforcement so that corruption can thrive (Damania et al. , 2004) • Depending on the nature of bribery (collusion or extortion) welfare implications can go in either direction

15. Lobbying • Probit analysis shows • Large, successful firms more likely to choose lobbying • Lobbying positively associated with level of economic development (Per-capita GDP) • Negative and significant relation between bribery (corruption) and lobbying membership (Campos-Giovanni, 2006) • One form replacing another?

16. Which face? • The common face of corruption-often called petty corruption • To be treated fairly, when you have complied in every sense is a basic right. • Petty corruption or harassment spreads in the population. This type of corruption affects the majority in their basic dealings and shape beliefs and norms (Mishra 2015). Corruption becomes the ‘norm’ and tends to get accepted to various degrees.

17. Negative Reciprocity • Does one's experience of bribery affect consequent attitude towards bribery and corruption? • Consider a scenario where individuals in a society are faced with both roles: (potential) bribe-giver and bribe-receiver • Individuals find themselves in multiple roles (giver as well as receiver)- can arise in several contexts • Examples in other contexts: Mocan (2013) reports that desired punishment for burglary goes up if the individual has been a victim in the recent past

18. Trust- Direct Reciprocity • Berg, Dickhaut and McCabe (1995) • Player A receives 10, passes on an amount x to Player B, who receives 3x and can pass on y to A, • Rational play prescribes x=y=0! • Strongly rejected by their experiment (30 out of 32 players had positive contributions) • What happens if B does not have a chance to pass it back to A but to some C? And A receives from some other player D?

19. Indirect Reciprocity • Do we still see reciprocity? • Yes. Dufwenbeg et al. (2001) conclude that indirect reciprocity induces only marginally smaller contributions than direct reciprocity. • Reciprocity can be direct as well as indirect, negative as well as positive. We focus on negative indirect reciprocity ∙ • Indirect-reciprocity mostly studied in its positive form: Buchan, Croson and Dawes (2000), Dufwenberg, Gneezy, Guth, and van Damme (2001), Engelmann and Fischbacher (2004), Seinen and Schram (2004), Greiner and Levati (2005), Kray, Ward, and Norton (2012). • Also called Generalized reciprocity: Pay it Forward (instead of Pay it Back)

20. Negative Reciprocity and Bribery Conduct series of decision experiments to study negative indirect reciprocity: If I am unfairly extorted, do I extort others?

21. Experiment • Two types of participant (roles): Citizen and (Government) Officials • To investigate the effect of experience (two roles), we repeat the game twice and introduce two treatments • Fixed Role Treatment (F): participants are randomly assigned to either of the roles (citizen or official) at the beginning of Round 1 and this role assignment is unchanged in both rounds • Re-assigned Role (R) Treatment: Participants are randomly assigned to either the citizen of the official role at the beginning of each round • Absolute Stranger Matching: Participants are randomly paired and never meet twice. • They are divided into groups of 4 players. Each player is matched with group members.

22. Experiment • Each round consists of two stages. • Stage 1- Citizen performs a real effort task. • Stage 2- Citizen gets the credit (for stage 1 task) only if the official approves and the official can ask for a bribe. • The citizen and official bargain over the bribe amount (using an unstructured bargaining protocol and deal can be made within 300 seconds). • The citizen does not get any credit for the task if there is no agreement.

23. Bargaining

24. Payoffs • The outcome of the negotiation determines whether the citizen receives the points earned in stage 1 or not: • If there is no agreement, citizen's credit is increased by 0 points, both get 10 points (participation payoffs). • If a bribe is agreed, 0<b≤20, citizen's payoff in this round equals 2(No of words) -b+10, official gets b+10∙ • Participants are paid the sum of earnings in both rounds

25. Results • All sessions were conducted in Ashoka University, India (similar experiment conducted in Delhi School of Economics)∙ • Each session lasted (on average) 60 minute. • Average payment was Rs 711.6 (about £8.50). • 172 students participated. RESULTS • In the second round, bribe amount is higher if the official was a citizen in the first round.

26. Final Remarks • Fairly robust result (in both experiments, and in different estimations) • Of course, there will be types who will behave differently, but it does not show in the aggregate. • We can look at the impact of other interventions (compensation measures, punishment) • The big question still remains: how do we combat this type of corruption?

27. Thank you!