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Does efficient corruption pay?

Mohammad Amin's picture

Buying and selling a product or service involves a number of costs, including time spent searching for the best prices, negotiating for good discounts, researching product quality and writing contracts where applicable. Broadly, these are called the transaction costs of economic exchange, and part of the reason firms exist is to keep transaction costs at a minimum.

Recently, I came across an interesting paper by Fisman and Gatti which suggests that bribery also involves a transaction costs—it takes time to negotiate a bribe rate and the terms of the favor to be done, e.g. the number of regulations to be avoided. The interesting point here is that if a transaction cost is indeed present, then the greater the number of regulations a firm would like to avoid, the more time negotiations require. Further, we can expect the bribe amount to increase too with the number of regulations the firm wants to avoid. Now putting these results together gives us a couple of testable hypotheses:

  1. If transaction costs are present in bribery, then the bribe paid and the time that firms spend dealing with government officials should be positively correlated; and,
  2. The bigger the transaction cost, the stronger the positive relationship between the time spent by firms dealing with government officials and the bribe amount.

Using data from Enterprise Surveys, the Fisman and Gatti study does find a positive relationship between the bribe amount and the time spent by firms dealing with government officials. More interestingly, it finds that this positive relationship is weaker in countries where agents are better aware of a going bribe rate (a more efficient bribe market) and in countries with a more elaborate structure of rules or greater degree of legal formalism. Both these factors leave less room for negotiations, lowering the transaction cost. The immediate effect of this is more “efficient corruption” and therefore increased welfare.

The idea of “efficient corruption” and the sorts of institutions that will lead to more efficient corruption is fascinating from a research point of view. Nevertheless, my first thought on this is the immiserizing growth effect—a lower transaction cost of bribery can increase the incidence of bribery, reducing welfare in the long run. If this effect is strong enough, it could more than outweigh the positive effects of more “efficient corruption” discussed above. Is this immiserizing growth empirically valid? And if it is, at what level of legal formalism does the immiserizing growth effect kick in? These are important questions for future research.


Submitted by Mark Ellery on
While greater knowledge of the market in bribes could potentially incentivise bribery (as you suggest), the simple process of revealing the market in bribery potentially opens up the black box for society to deal with its implications. Here is one initiative that is interesting in this regard

Submitted by Marc on
It's the opposite. Bribery practice inhibits business, it's just what happens here in Brazil. Regulations are very vast and intricate, on the other hand bribery is expensive and sometimes even more expensive than the normal price of the license, but faster. What people do? Everybody work at the informal market, they don't need to pay bribes or wait for licenses. And huge companies, like Bunge or Nestlé, that don't accept to pay bribes and don't want to wait 10 years for a specific license simply give up of building a factory etc. Empirical Evidence: I remember when the Brazilian Federal Police asked Bunge to pay them bribes for the Bunges' allowance to pick up their wheat at Rio's Port. Do you know what the Dutch CEO of Bunge answered? Stay with the wheat, let it rotte... Bribes, at least in Brazil, don't help at all.

Submitted by Moh on
There are other costs associated with the payment of bribes: a poor contract execution and the absence of enforcement of contract. A bribe does not only reduce the transaction costs, it also deprives the transaction of its binding effect. It makes the transaction economically pointless as it reduces its substance to an exchange of money. For an economy, what is the cost of a road, a school, or a hospital that was not built?

Submitted by Rasika Gokhale Athawale on
Corruption can be 'efficient' for a company (which saves significant time and cost by doing so) and to its shareholders (in the short-term). However to the nation per se, it is not at all efficient. Not only in terms of costs (say an infrastructure project built poorly and therefore requires frequent maintenance expense) but also since it leads to a moral downgrade in gen next - thus spiraling the negative effects.

Following up on some of the comments so far, I would like to clarify that "efficient" corruption is NOT in anyway a justification for corruption. In fact, the immiserizing effect i have mentioned is based on the fact that corruption can have serious negative effects on society. Why would it be immiserizing otherwise?

Submitted by kdpgrahi on
The study is interesting. Corruption is a subject requiring much more in-depth studies like this.

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