Antonio Maria Costa, head of the United Nations Office on Drugs and Crime, recently estimated that in Africa alone the cost of corruption has reached 150 billion dollars per year, equivalent to a quarter of the continent's GDP. The cost of corruption for the world economy hovers around a trillion dollars. According to the World Bank Institute, a country can quadruple its national income if it effectively controls corruption; business can grow as much as 3 percent faster, and child mortality can fall as much as 75 percent. How to fight corruption remains the key question.
This paper can assist policy makers fighting corruption at the local level. We will provide an analytic framework that emerges from Robert Klitgaard's book Corrupt Cities: A Practical Guide to Cure and Prevention, and we will combine insights from Thomas Schelling and other experts in game theory, applying also the economics of crime and the economics of local institutions. Using this framework, we analyze the four key steps to reduce corruption: (1) comprehending corruption, (2) assessing it, (3) implementing reform, and (4) sustaining achievements. Throughout the paper, corruption is generally defined as the misuse by government officials of their governmental powers for illegitimate private gain.
Step 1. Comprehending Corruption
Suppose you are the mayor of a city with poor public services because of widespread corruption. In your city, many factors such as low public salaries, poor transparency, incompetent personnel, etc., allow and encourage corruption. You have recognized that you need to fix the dysfunctional and corrupt municipal system. You decide to analyze the system in three ways to identify the key conditions that encourage corruption and the key interventions that will reduce it.
The Principal-Agent-Client Framework
This framework is commonly used in economics and political science and remains a useful tool for this purpose. It has become relevant in any government or policy situation that involves more than one person delivering and benefiting from the service. In this framework, the mayor is called the principal. He or she provides public services such as building infrastructure and collecting taxes to the city's residents. The mayor cannot provide these services alone however, so he or she has to hire agents, such as public officials, tax collectors, or procurement officers, to perform these services. City residents and local firms are usually the final consumers of these public services, and they are called the clients. The better the services provided to the clients, the more (political) credit the principal receives.
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The principal-agent-client relationship can be described as a three-player "game" in which the principal sets the rules to affect the behavior of the agents and clients, who may have divergent interests. The rules of this game are as follows:
* Hires and manages the agents.
* Determines the agents' rewards and penalties, which include salary, performance-based bonuses, achievement acknowledgment, job security, job prestige, legal penalties for corrupt acts, etc.
* Obtains information about the agents' performance through internal monitoring schemes, external evaluation systems, and information from the public and the media.
* Structures the agent-client relationship. Examples include how much discretion and power the agent has in dealing with the client, and how transparent the relationship should be.
* Affects the agents' moral cost, which is a psychological tension in the mind of corrupt agents. This cost includes both the worries before corruption is discovered and the shame afterward.
The agents have two choices:
* Be honest.
* Be corrupt.
The clients …