Academic journal article Economic Inquiry

Legalizing Bribe Giving

Academic journal article Economic Inquiry

Legalizing Bribe Giving

Article excerpt

I. INTRODUCTION

Corruption remains an endemic problem in the developing world and has become a central political issue in many countries. Empirical work has considerably advanced our understanding of how widespread corruption is and how it can cause harm. (1) Governments and agencies such as the World Bank have sponsored numerous anticorruption programs. However, regarding how to best fight corruption in practice, "research has lagged behind policy." (2)

Recently, Kaushik Basu--chief economist then of the Indian government and now of the World Bank--proposed a specific approach. In Basu's (2011) pamphlet, "Why, for a Class of Bribes, the Act of Giving a Bribe Should Be Treated as Legal" he describes a society where bribery is "rampant ... a scourge that deserves to be banished," and proposes--for the case of "harassment bribes" that people pay to get services they are legally entitled to (3)--the following policy:

Legalize bribe giving, double the fine for bribe taking, and make the bribe taker pay back the bribe if discovered.

When a citizen bribes a bureaucrat, under traditional law the two become partners in crime. They thus lack incentives to report the activity. Under Basu's policy (BP), which he deems "fairly radical," incentives are provided for the bribe giver to report the bribe taker. If this is foreseen, the bureaucrat would not accept the bribe in the first place. That is the key idea.

Will it work? A hot debate has raged in Indian and international press. The Economist appeared sympathetic. (4) However, in some quarters, the proposal stirred outrage and commentators discarded it mainly on moral grounds. (5) More tempered/thoughtful criticism has come from economists. Dreze (2011), in particular, wrote a penetrating comment arguing that Basu does not give adequate attention to some institutional and moral concerns which may change conclusions.

Basu's intriguing presentation is informal as is the heated debate it inspired. Perhaps one should not expect the issues to be easily settled through such discourse? The proposal is reminiscent of somewhat analogous tools used in other fields, such as leniency policies in antitrust and whistleblower protection and reward schemes against fraud and organized crime. Scholars who studied those measures have suggested they may be effective if well designed and administered, but counterproductive if details are not set right. (6) Deeper understanding of the Pros and Cons of subtle legal rules may require careful scrutiny within a formal model.

In Section II, we develop a simple formal model to represent the scenarios Basu and his commentators care about as explicit games. By comparing equilibria, we draw conclusions regarding the conditions under which BP is likely to be effective. BP gets mixed, context-dependent grades and we highlight complementarities with other policies. The proposal works best if coupled with measures that increase the costs for bureaucrats of denying citizens what they deserve and that reduce the costs for citizens of getting justice. Verifying whether a bribe was paid entails costs which may deter reporting, hence BP works better against larger bribes. Inefficient or corrupt law enforcement increases these costs, so BP will be more effective if it is part of a wider reform package that also fosters independence and accountability of the legal system.

In Section III, we take into account also the legal and moral considerations brought up by Dreze, revealing other problems related to BP. We propose a modified policy (MBP) that escapes many objections. The idea is inspired by leniency rules in antitrust. Rather than legalize bribe giving, only those who report having paid a bribe would be awarded legal immunity.

Extortionary harassment bribes are distortive when they are not paid, because a justified and presumably welfare-enhancing licence is then not issued. With other, arguably often more serious, forms of corruption distortions occur when bribes are paid, not otherwise. …

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