Presentation by Tito Cordella "Asymmetric Punishment as an Instrument of Corruption Control" at the SITE Corruption Conference, 31 August 2015. Find more at: https://www.hhs.se/site

1. Asymmetric Punishment as an Instrument of Corruption
Control
Karna Basu,* Kaushik Basu** and Tito Cordella**
* Hunter College, CUNY, The World Bank**
SITE Conference, 2015
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2. The Problem
As citizens we are (or should be) dismayed by corruption
And, emotionally we tend to ask for harsh punishments
As economists we are concerned about corruption too
But we have to look at punishments without forgetting incentives
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3. The Economics of Corruption (ii)
Costs and consequences vary by the type of bribe
When a bribe is paid to lower costs, clear potential for e¢ ciency losses
Bribes for market clearing could raise total surplus
What about paying to get government o¢ cials to do their job?
Bribes may just entail a transfer of surplus but
violate basic fairness considerations
possible e¢ ciency e¤ects–distorted incentives for entry into public
o¢ ce
a¤ect attitudes towards government
(but can also provide incentives)
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4. The Economics of Fighting Corruption
Detecting corruption is particularly hard:
because bribe giver and takers are partners in crime
This means that if punishment and law enforcement play an
important role
Incentives have to be set right...to break omertà
Asymmetric punishments
create ex-post incentives to reveal corruption or violate the terms of
informal agreements (Rose-Ackerman, 1999; Lambsdor¤ & Nell, 2007)
Some lab experiments (Engel et al, 2012; Abbink et al, 2014)
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5. Asymmetric Punishment - Harassment Bribes
This paper focuses on “harassment bribes” (extortion)
bribe to receive tax refund; bribe to not be slapped with false charges
Basu (2011): punish bribe-taking, decriminalize bribe-giving, o¢ cial
must return the bribe if detected
strong ex-post incentive to whistle-blow
anticipating this, o¢ cials will not demand a bribe in the …rst place
The proposal sparked a controversy (Indian Parliament, Economist,
Le Monde, Drèze...)
And also some rigorous economic analysis (Dufwenberg & Spagnolo,
2015; Oak 2015)
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6. Our Contribution
We endogenize bribe size and show how it is a¤ected by the structure
of punishment
We endogenize the detection probability and show that asymmetric
punishment eliminates bribery if
(i) whistle blowing is cheap
(ii) the value of the service exchanged is low
The region in which asymmetric punishment eliminates bribery and
the region in which the elimination of bribery increases welfare may
not overlap
The design of incentive compatible anti corruption policy is a (science
inspired) art...
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7. This Paper - Setup
Entrepreneur (E) is entitled to receive a license from an o¢ cial
O¢ cial (O) can demand a bribe in exchange for this license
Government set the penalty structure
how it a¤ects bribe size
and welfare
Two new ingredients
endogenous bribe size, bribe size is determined by Nash Bargaining
endogenous detection probability, bribe revelation is costly for the
entrepreneur
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8. Benchmark Model (i)
Full value of license is L
O¢ cial can deliver licence without demanding a bribe
UE 2 [0, L]
UO R 0
O¢ cial can demand a bribe B in exchange for full value of license
if they fail to agree on a bribe amount
DE 2 [0, L]
DO < UO
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9. Benchmark Model (ii)
if they agree on a bribe amount (B)
VE = L B p (FE βB)
VO = B p (FO + βB)
p (exogenous) probability of detection
FE + FO F : penalties if detected (assume FO FE )
β fraction of bribe to be returned
Perfectly symmetric punishment: FE = FO ; β = 0
Perfectly asymmetric punishment: FE = 0; β = 1
O¢ cial will demand a bribe i¤ Nash bargaining solution exists and
VO (B) UO
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10. Bargaining
If a bribe is demanded, bribe size is determined by Nash Bargaining
B arg max
B
[VE (B) DE ] [VO (B) DO ]
Equilibrium bribe size
B =
L DE + DO + p (FO FE )
2 (1 pβ)
Corresponding utility
VE (B ) = VO (B ) =
L DE + DO pF
2
Net surplus is split evenly
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11. Comparative Statics
Bribery exists i¤ expected total penalties are su¢ ciently low
pF L DE + DO 2UO
Bribe size
B =
L DE + DO + p (FO FE )
2 (1 pβ)
rises if o¢ cial’s …ne rises
drops if entrepreneur’s …ne rises
rises if share to be returned (β) rises
rises if detection probability rises (if FO > FE )
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12. Bribe size as function of p
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13. Lessons
Bribery depends on whether total expected penalties are su¢ ciently
large
How penalties are distributed and whether they are returned doesn’t
matter
To eliminate bribery, just drive pF up (not so easy)
But, if penalties are not driven high enough, bribery will persist with
larger bribes exchanged
Harsher penalties can make the problem of bribery seem more acute
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14. Endogenize p
The entrepreneur can raise p at a cost c(p)
c (p) =
0, if p = p;
k, if p = ¯p.
VE (B) L B p(FE βB) c (p)
Assume selection of B and p satisfy rational expectations
agents bargain over bribe size taking expected p as given
entrepreneur chooses his optimal p
Basically, we look for intersections of best-response functions B (p)
and p (B)
Bribe demanded if such a solution exists and leaves enough surplus
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15. Observations
B (p ) =
L + DE DO + p(FO FE ) c(p)
2 (1 βp )
B (p) doesn’t necessarily rise in p
FO > FE –upward pressure on bribe size (as before)
c (p ) –downward pressure on bribe size
What about the shape of p (B)?
Under symmetric punishment: p (B) = p (entrepreneur gains nothing
from detection)
Under perfectly asymmetric punishment: p (B) rising (step-wise) in B
if B high enough, and k low enough, it is worth incurring cost to
recover bribe
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16. Main Result
Under endogenous whistle-blowing:
(i) For k kl :
(a) if L < ¯L, bribery is eliminated;
(b) if L ¯L, there is a unique bargaining equilibrium (B (¯p) , ¯p)
(ii) For k 2 (kl , kh]:
(a) if L < ¯L, there is a unique bargaining solution (B (p), p);
(b) if L ¯L, there are two possible bargaining solutions,(B (p), p)
and (B (¯p) , ¯p)
(iii) For k > kh, there is a unique bargaining solution (B (p), p).
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17. Summing up
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18. Observations
Asymmetric punishment e¤ective as a bribery deterrent only if k low
and L low
At other values, asymmetric punishment
has no e¤ect,
or results in bribery + whistle-blowing (bribe size may rise or fall for
high k)
But, if bribery eliminated at some (k, L), doesn’t mean it will
continue to be eliminated for smaller values
as k drops, whistle-blowing urge reinforced
but also, more surplus remains after whistleblowing
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19. Welfare (i)
Policy recommendations depends on SWF
Maximizing total surplus? Not sure
Maximizing entrepreneur surplus? Better
Does asymmetric punishment raise entrepreneurs’surplus? Not always
if whistle-blowing happens and bribery survives, welfare drops
if bribery is eliminated, is entrepreneur better o¤?
only if no-bribe outcome is su¢ ciently good (motivated o¢ cials),
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20. Welfare (ii)
If the no bribe outcome entails signi…cant e¢ ciency costs
bribery elimination may be welfare improving for small license values
and welfare reducing for larger ones
Only partial overlap between the regions where
asymmetric punishment eliminates bribery
elimination of bribery is desirable
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21. Concluding Thoughts
A …rst step towards thinking about punishment design when bribe size
and detection are set endogenously
The picture we get is a pretty nuanced one: No one size …ts all
solution
General lesson: asymmetric punishment is an e¤ective way to reduce
corruption
when the judicial system is e¢ cient
and the values at stake are not very high (or the liquidity constraints
binding)
with development both (should improve)
and we face additional trade-o¤s
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22. Concluding Thoughts
Our recommendation: asymmetric punishment for small value
transactions
But not for high value transactions, especially when
law enforcement is not very strong
and o¢ cials are not very motivated
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23. Thank you!
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