A Note on Public Sector's Corruption Equilibrium and Network Economy

Article excerpt

Abstract

Most of the studies on Public Sector's corruption focused on the micro economic aspects of the criminal behavior and only limited research has conducted on the macro level in general and market equilibrium in particular. In an attempt to better understand the phenomenon of corruption this paper uniquely analyzes corruption in view of the 'network economy' theory and suggests a theoretical framework for understanding corruption equilibrium. I claim that corruption reaches equilibrium under two extremes which make it difficult for countries to move from one to the other. Unfortunately, it is thus almost impossible for a country to make a significant transition on its own and the chances of gradual reforms are generally not very good.

Keywords: Corruption, Network Economy, equilibrium

JEL: K0, E69

1. Introduction

A well-known story describing public sector's corruption and its effect on society is attributed to Tiberius Caesar, as documented by Cornelius Tacitus, the senator and famous historian of the Roman Empire, in his great work The Annals. According to Tacitus, the Senate of Rome decided to grant a large sum of money to an established family that had served the Senate for many years. The reason behind the Senate decision was the inconvenient situation the family faced: due to personal business losses, the family risked forfeiting its seat in the Senate in the nearest census. Because of these losses, the family would not reach the minimum equity threshold necessary to hold a Senate seat without a grant. When Tiberius Caesar heard about the Senate's decision, he rushed to the Senate and "convinced" the Senators to cancel the grant, claiming that an authority that distributes the public treasury to its friends is essentially unjust. After the Senate annulled the grant, Tiberius Caesar announced that he would provide that family a personal grant, allowing the family to meet the equity threshold and keep the Senate seat.

Public sector's corruption exists in all countries, both developed and developing. Moreover, corruption in public institutions is generally perceived to have become structured and well-established, involving well-organized networks. Rose-Ackerman (1999) explains that corruption is usually carried out in networks where trust and reciprocity exist among its members. From an economic perspective, network ties reduce transaction costs and can enables corrupt transactions.

The motives for illegal activity (in its many forms, such as corruption) and its effect on society have been studied extensively in the social sciences and criminology. However, only in the late 1960s did economists begin to study this issue (see Becker, 1968; Stigler, 1970; and Ehrlich, 1973). These and other researchers demonstrated that economic theory can provide important insights into criminal behavior and can contribute to the theoretical analysis of its impact on the economy and on society as a whole.

The research of public-sector corruption has received growing attention in recent years. Macrae (1982) defines corruption as an arrangement that involves a private exchange between two parties, which (1) influences the allocation of resources either immediately or in the future, and (2) involves the use or abuse of public or collective responsibility for private ends (see also Bardhan, 1997).

However, most of the studies focused on the micro economic aspects of the criminal behavior and only limited research has conducted on the macro level in general and market equilibrium in particular.

In an attempt to better understand the phenomenon of corruption this paper uniquely analyzes corruption in view of the 'network economy' theory and suggests a theoretical framework for understanding corruption equilibrium.

2. Theory

Zelekha and Bar-Efrat (2011) suggested in an empirical research examining the effect of crime on private investment in Israel that crime and corruption has the characteristics of a network economy. …

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