Saktinil Roy July 2 nd , 2010

1. Saktinil Roy July 2nd, 2010 What might cause a Benevolent Government to be Corrupt when Agents are Honest? An Insight with Triadic Relationships

2. What does the current literature tell us? • Most work analyzing the causes and consequences of corruption assume a principal-agent framework. • A government official is an agent to the public entrusted with performing tasks, but its actions and the specific circumstances are not fully observed or monitored. • A dishonest government official either makes illegitimate claims in return of its service or engages in illegal deals with private agents looking to evade the law (e.g. tax evasion or violation of environmental regulations).

3. What does the current literature tell us? (contd..) • Notice two key elements • The bureaucrat is “dishonest” and “opportunist” • Only two parties interacting – the government/supervisor and the bureaucrat or the client and the bureaucrat

4. What does the current literature tell us? (contd..) • Policy implications • Monetary incentives to government bureaucrats – the efficiency wage argument (Becker and Stigler, 1978; Rose-Ackerman, 1978) • Increase in economic and political competition (notably, Shleifer and Vishny, 1993)

5. Problems with this approach • The assumption of agent dishonesty for all types of corruption to occur is troubling in face of the twin facts: • Corruption is widespread in many less developed countries and also in some advanced countries • Real life examples where people are motivated by non-monetary incentives are at least as widespread • So, can we safely assume that it is always due to imperfect monitoring of dishonest agents?

6. Problems with this approach (contd..) • The assumption of “dishonest” agents is not always quite consistent with recent findings that indicate • agents are emotionally attached to the idea of “fairness” (Akerlof and Shiller, 2009) • often people are happy to be part of an organization. So, part of their satisfaction depends on how well they work to fulfill the goals of the organization or what others think how well they performed (Akerlof and Kranton, 2005; Besley and Ghatak, 2005)

7. Problems with this approach (contd..) • Most work also ignores how corruption at the group level affects corruption at the individual level – an important criterion. • In a different strand some work done in this area (Tirole, 1996; Andvig and Moene, 1990; Cadot 1987; Sah 1988)

8. Problems with this approach (contd..) • Does not incorporate the influences of third parties from outside the government • However, • real world instances suggest that government officials are quite often under pressure from private influential parties • Individuals are, at times, caught by adverse circumstances (e.g. Basu, 1986, 2000) • So, can “honest” bureaucrats be “corruptible”? • This is my point of departure

9. Problems with this approach (contd..) • Overall, the literature tends to ignore that • like social practices such as caste, rat race, and racial discrimination, types of corruption that exhibit a recurrent pattern are also social phenomena – the causes and consequences are pretty much implied by the society’s institutional structure. • corrupt incidents are not always acts of bureaucrats who are “dishonest” by nature or due to lack of monetary incentives.

10. The approach of the present research • The literature has taken an extreme stance: “dishonest” agents engaging in corruption. • I address the issue from the other extreme: “honest” agents engaging in corruption due to third party influence? • So, corruption in the context of triadic relationships • Triadic relationships in economics: Akerlof (1976), Basu (1986) • Cite real world examples • The idea: we get better insights into the many realistic possibilities where the government is partly benevolent and bureaucrats are partly honest.

11. The Model • Context • Assistance programs for the rural poor in an LDC – such as Swarnjayanti Gram SwarozgarYojana in India (IRDP until 1999) • Selection of beneficiaries depending on skills and background. • The poor performance of these programs is partly due to “poor targeting” – often assistance provided to people who deserve less or nothing. • According to NABARD: as high as 70 percent in the state of Andhra Pradesh and 47 percent in the state of Gujrat in India • Fenichel and Smith (1992) discuss failure of IRDP in Zambia due to poor targeting.

12. The Model (contd..) • Bureaucratic corruption is often thought to be responsible for “poor targeting.” • However, several accounts on these programs suggest that power relations in traditional rural societies – particularly as they pertain to the role of the rural elite – has to do with poor targeting. • Succinctly described by the World Bank (World Development Report, 2000/01): even if sufficient fiscal autonomy is vested to a local government, political manipulation and rent seeking by local elites (quite often landlords) might turn that privilege against the poor. • Question: How this is possible as an equilibrium outcome?

13. The Model (contd..) • I examine this with a very simple model • Three agents: • The government official (G): • Honest – gets zero utility from bribe • Positive utility from reputation of an able bureaucrat • A potential beneficiary (L) • A member of the rural elite (Y) who buys labor from L • Based on documented information, G determines how much assistance L and other beneficiaries should receive.

14. The Model (contd..) • Unlimited surplus labor – the wage rate is fixed at the subsistence level. • Under normal conditions, Y maximizes utility by choosing the amount of work to be bought from L – but L should receive at least its reservation utility. • Gives a take-it-or-leave-it offer to L • Question: • Can Y intervene in the assistance provision • process and get a larger amount of assistance • for L, part of which it enjoys itself?

15. The Model (contd..) • The sequence of moves • Y decides whether or not to intervene in the assistance provision process • G offers an amount of assistance to L • L accepts or rejects G’s offer • Y decides whether or not to buy labor from L – if it decides to buy then it gives a take-it-or-leave-it offer . • L accepts or rejects Y’s offer

16. The Fair Outcomes • Full information: Y does not intervene, L receives the legitimate amount of assistance, and Y buys labor from L. • Asymmetry of information about L’s eligibility: Y does not intervene, G provides L with an amount of assistance based on a probability distribution, and Y buys labor from L. • Note: these can be realized as parts of subgame perfect Nash equilibria when Y adopts the strategy of “no interference.”

17. Corruption under Influence and Coercion • Corruption occurs when G deviates from the public mission by providing a greater amount of assistance to L than what it deserves. • Asymmetry of Information: • G seeks Y’s help to learn more about L’s eligibility • Y deliberately overstates L’s eligibility • G believes partly and alters the probability distribution about L’s eligibility for all possible amounts of assistance. • As a result, G might provide L with a greater amount of assistance than what it deserves • Part of the additional illegitimate amount is extracted by Y via the offer of employment • L accepts this arrangement as long as it is better off with the employment from Y than with the whole assistance amount but no employment.

18. Corruption under Influence and Coercion (contd..) • Overt threat under full information: • Y can put forward an overt threat of harassment to G and ask to provide an illegitimate, greater amount of assistance to L. • It will do so if the cost involved in harassing Y is less than the extra benefit from part of the additional illegitimate assistance amount that it will extract from L. • G will provide a greater illegitimate amount of assistance to L if the loss of utility due to harassment is greater than the loss of utility due to bad reputation of a corrupt bureaucrat

19. Corruption under Influence and Coercion (contd..) • Covert threat under full information • Y can adopt and announce the following strategy. “G should provide L with a greater amount of assistance than what it deserves. If G does not obey me and L still accepts G’s offer then I will not hire L.” • There is no direct threat to G, the threat is only to L. But it amounts to an indirect threat to G.

20. Corruption under Influence and Coercion (contd..) • For a specified amount the above strategy is “credible” and will lead to a subgame perfect Nash equilibrium if the following hold. • The loss of utility due to bad reputation of a corrupt bureaucrat is less than the loss of utility due to bad reputation resulting from part failure of the assistance program. • L is better-off with an employment from Y than with the legitimate assistance amount and no employment from Y. • Y can find a substitute for L without any additional cost – which is possible under unlimited surplus labor. • The off-the-equilibrium path along which the threat will be carried out can be realized as a Nash equilibrium.

21. Corruption under Influence and Coercion (contd..) • Note that in ALL three cases G will be labeled as a “corrupt” bureaucrat and suffer a loss of reputation, although it does NOT accept any bribe. • Possible similar incidents in other contexts, such as tax collection, granting business license, pollution control, or arms purchase contracts.

22. Policy Implications • Increased monetary incentives to bureaucrats is a solution that is incomplete at best – could even misdirect economy’s resources. • Increased economic and political competition in the public sphere as well as in private sphere. • One way of achieving the above goal is to provide greater entitlement to the vulnerable section of the society. But, note that the status quo of concentration of power and wealth is an impediment to realizing this. • A vicious circle in effect. • Greater law enforcement, better transparency of governmental procedures, and greater participation of people in the decision making process.