Corruption, Game Theory, and Rational Irrationality

If we had to name one reason why petty corruption is so difficult to tackle, it has to be that it makes sense for people to engage in it than not. Unlike measures such as smoking bans, seatbelt laws, and drinking and driving laws where there is a clear individual benefit to those who do the “right thing,” corruption bans are hard to enforce because there aren’t easily discernible individual benefits to those who obey them. Rather, in countries where corruption is systemic, people who do what is right and follow whatever anti-corruption law might be in place will find themselves losing out to those who don’t.

In fact, with corruption, individual opinion doesn’t seem to matter much in one’s decision whether to engage in it. In theory, most people believe that corruption is wrong. But in practice, the incentive that motivates an individual’s behavior in a corruption-prone situation is their perception of what everyone else would do in a similar situation. Would your pregnant colleague pay a bribe so that she could jump the queue and get an H1N1 vaccination when the vaccines are in limited supply? Would your neighbor, an entrepreneur, slip a few notes to a civil servant under the table to expedite the process of obtaining a business license? If the answer to each of these questions is a “yes,” then why should you bother going against the system alone? Why should you do the right thing and find yourself at a disadvantage to everyone else who will do what it takes to obtain what they need given the environment and culture in which they live?

Moreover, avoiding corruption in this setting can also lead to inefficient outcomes in addition to putting you in a disadvantaged situation. For example, if you don’t bribe, not only will your wife not get the vaccine, but also your colleague who bribed and got the vaccine might need it less than your wife does. The business license will be given not to you – the most deserving and capable entrepreneur – but to your neighbor who bribed who might not have been the most suitable candidate to get the license in the first place. Corruption hinders economic development by introducing inefficiencies in the system. And, unfortunately for those fighting corruption, it is difficult to confront because it is actually quite logical for people to succumb to the temptation to bribe or be bribed. Corruption is the Prisoner’s Dilemma in application.

In a recent New Yorker article, “Rational Irrationality,” John Cassidy explains the financial crisis with game theory which can very well be applied to corruption. He argues that the cause of the crisis was not that Wall Street C.E.O.s acted with “greed, overconfidence, and downright stupidity” as the word on the street would have you believe, but that they acted rationally, given the circumstance. He writes: “the root problem is what might be termed ‘rational irrationality’ – behavior that, on the individual level, is perfectly reasonable but that, when aggregated in the marketplace, produces calamity.”

Cassidy attributes the logic of rational irrationality to John Maynard Keynes, who, in “The General Theory of Employment, Interest, and Money,” likens investing to a game of musical chairs and newspaper competitions on pretty faces. To win either game, one’s task was to choose the outcome which you think others will select, regardless of your personal opinion. As financial markets are made up of people reacting to what others are doing, it is a version of the Prisoner’s Dilemma in which one’s actions affect everyone else’s welfare, and everyone else’s actions affect one’s welfare. This means that “attempts to act responsibly and achieve a cooperative solution cannot be sustained, because they leave you vulnerable to exploitation by others.” The similarity between the behaviors of Wall Street executives and citizens yielding to corruption is uncanny. In both cases, individuals are behaving rationally in the name of individual gain based on their speculations about how others are going to behave, with disastrous consequences to society.

So how should we fight corruption? One way is the top-down approach, with the government enforcing a ban on corruption. In countries where corruption is rife, this would be difficult to enforce for multiple reasons, but one in particular stands out as explained eloquently by John Macrae in “Underdevelopment and the Economics of Corruption: A Game Theory Approach”: “The response to a situation of this kind emerging has generally been to suggest regulation by outside authority of firm or individual behavior in an effort to ensure that private and public interests are brought into line. But this solution is of doubtful applicability in this case for it is the very behavior of these authorities that has been made an integral part of the game. The shock that the formation of the problem in the above way provides is that there may be no effective ‘independent’ agent to implement public fines or other sanctions for these agents are already engaged in taking bribes themselves.” 

Absent effective government enforcement mechanisms, we need to turn to the people. So can we expect individual citizens to fight such an endemic practice, given what we know about corruption, game theory, and rational irrationality? We can’t – at least not if people were to act single-handedly. But, as we heard at the discussions during UNCAC Conference of the State Parties last week in Doha, there is hope. People respond to the notion that they are not alone in the battle against corruption. People are willing to put up a fight if only they knew that there were others with a similar belief, the same conviction and resolve to counter demand for bribes. The important task is to communicate this critical information to the people – that they are not alone – so that they can build up the courage to come together and mobilize around this common cause. Then, public opinion can finally transform to condemn corruption at the individual level with an aggregate benefit to society as a whole.

I would like to thank Johannes Koettl and Ellen Tan for their contribution to the thinking behind this post.

Photo Credit: Flickr user Lars Plougmann