Uploaded on

NES 20th Anniversary Conference, Dec 13-16, 2012 …

NES 20th Anniversary Conference, Dec 13-16, 2012
Decentralized Bribery (based on the article presented by Sergey Popov at the NES 20th Anniversary Conference).
Author: Sergey Popov, Centre for Institutional Studies
Higher School of Economics

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
207
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
2
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Decentralized Bribery Sergey V. Popov Moscow, December 14, 2012Centre for Institutional Studies Higher School of Economics
  • 2. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free.
  • 3. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free. Problems First one — obvious,
  • 4. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free. Problems First one — obvious, ex-post verifiable.
  • 5. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free. Problems First one — obvious, ex-post verifiable. Second one —
  • 6. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free. Problems First one — obvious, ex-post verifiable. Second one — a transfer.
  • 7. Introduction Bribery Bribes Likhoimstvo = taking bribes for doing bad stuff. Mzdoimstvo = taking bribes for doing stuff you’re supposed to do for free. Problems First one — obvious, ex-post verifiable. Second one — a transfer. This paper: there are welfare implications for the second type of bribe.
  • 8. Introduction Literature Empirical Literature Exposure to corruption ⇒ less investment, slower growth. Corrupt economies are heavily regulated. Putin is blamed for economic development, but not for corruption.
  • 9. Introduction Literature Empirical Literature Exposure to corruption ⇒ less investment, slower growth. Corrupt economies are heavily regulated. Putin is blamed for economic development, but not for corruption. Theoretical Literature Stealing from governmental coffers is bad for development. Rent-seeking is vacuous. Bribes can improve the allocation.
  • 10. Introduction This Paper Questions How does the “transfer bribe” affect the capital market? Can it be beneficial? Can it harm?
  • 11. Introduction This Paper Questions How does the “transfer bribe” affect the capital market? Can it be beneficial? Can it harm? Answers It can make the society worse off by scaring small businesses away.
  • 12. Introduction This Paper Questions How does the “transfer bribe” affect the capital market? Can it be beneficial? Can it harm? Answers It can make the society worse off by scaring small businesses away. It might not be a good idea to decentralize potential bribery.
  • 13. Model Fundamentals Agents Agents consume a single good. Agents have roles: investor or inspector.
  • 14. Model Fundamentals Agents Agents consume a single good. Agents have roles: investor or inspector. Roles investor gets a random project, need to invest K, after investment observes return R, needs to pass an inspection.
  • 15. Model Fundamentals Agents Agents consume a single good. Agents have roles: investor or inspector. Roles investor gets a random project, need to invest K, after investment observes return R, needs to pass an inspection. inspector asks for a bribe, if not paid does not pass the project.
  • 16. Model Investors Investor observes K — project size. Expects to pay a bribe s. Investor chooses whether to start up a project: After investment, project return R is observed. If s > RK, investor can decide to not pay the bribe and walk away. Expected return is E[RK − s∗ ]+ − K.
  • 17. Model Investors Investor observes K — project size. Expects to pay a bribe s. Investor chooses whether to start up a project: After investment, project return R is observed. If s > RK, investor can decide to not pay the bribe and walk away. Expected return is E[RK − s∗ ]+ − K. Will start up the project if E[R − s∗/K ]+ > 1.
  • 18. Model Investors Investor observes K — project size. Expects to pay a bribe s. Investor chooses whether to start up a project: After investment, project return R is observed. If s > RK, investor can decide to not pay the bribe and walk away. Expected return is E[RK − s∗ ]+ − K. Will start up the project if E[R − s∗/K ]+ > 1.ResultWhen K > K ∗ (s∗ ), investor participates.
  • 19. Model Inspectors Inspector know neither K nor R of the project. Inspector decides on the bribe size s, believing in K ∗ . The inspector’s problem is: max sP (RK > s). s
  • 20. Model Inspectors Inspector know neither K nor R of the project. Inspector decides on the bribe size s, believing in K ∗ . The inspector’s problem is: max sP (RK > s). s
  • 21. Model Inspectors Inspector know neither K nor R of the project. Inspector decides on the bribe size s, believing in K ∗ . The inspector’s problem is: max sP (RK > s). s When K is trivial s max s P (R > ). s K 1−FR (s/K)
  • 22. Model Inspectors Inspector know neither K nor R of the project. Inspector decides on the bribe size s, believing in K ∗ . The inspector’s problem is: max sP (RK > s). s When K is trivial s max s P (R > ). s K 1−FR (s/K) The solution is s/K 1 − FR (s/K ) = . fR (s/K )
  • 23. Model Inspectors In general, the solution is +∞ (1 − FR (s∗/K )) fK (K)dK EK [P (R > s∗/K )] s∗ = 0 +∞ 1 = . /K fR (s∗/K )fK (K)dK EK [1/K fR (s∗/K )] 0
  • 24. Model Inspectors In general, the solution is +∞ (1 − FR (s∗/K )) fK (K)dK EK [P (R > s∗/K )] s∗ = 0 +∞ 1 = . /K fR (s∗/K )fK (K)dK EK [1/K fR (s∗/K )] 0 R ∼ Exp(α), and two levels of investment size (KH and KL ) produce s
  • 25. Model Inspectors In general, the solution is +∞ (1 − FR (s∗/K )) fK (K)dK EK [P (R > s∗/K )] s∗ = 0 +∞ 1 = . /K fR (s∗/K )fK (K)dK EK [1/K fR (s∗/K )] 0 R ∼ Exp(α), and two levels of investment size (KH and KL ) produce Only H types s
  • 26. Model Inspectors In general, the solution is +∞ (1 − FR (s∗/K )) fK (K)dK EK [P (R > s∗/K )] s∗ = 0 +∞ 1 = . /K fR (s∗/K )fK (K)dK EK [1/K fR (s∗/K )] 0 R ∼ Exp(α), and two levels of investment size (KH and KL ) produce Only H types Both H and L types s
  • 27. Model Inspectors In general, the solution is +∞ (1 − FR (s∗/K )) fK (K)dK EK [P (R > s∗/K )] s∗ = 0 +∞ 1 = . /K fR (s∗/K )fK (K)dK EK [1/K fR (s∗/K )] 0 R ∼ Exp(α), and two levels of investment size (KH and KL ) produce Only H types Both H and L types s
  • 28. Model Equilibrium The equilibrium is (K ∗ , s∗ ) such that: all projects bigger than K ∗ are implemented; the bribe size is s∗ ; both are optimal decisions subject to rational beliefs.
  • 29. Model Equilibrium The equilibrium is (K ∗ , s∗ ) such that: all projects bigger than K ∗ are implemented; the bribe size is s∗ ; both are optimal decisions subject to rational beliefs. Equilibrium exists autarky: no projects are implemented restricted: a subset of projects is implemented abundance: all projects are implemented
  • 30. Predictions Capital Market The expected return of a project of size K is [R − s/K ]+ − 1. The total profit is [RK − s]+ − K. The derivative of that with respect to K is Average return Extra chance of no cancelling +∞ +∞ s ¯ s¯ R− dFR − 1 +K dFR . s ¯ K s ¯ K2 K K
  • 31. Predictions Capital Market The expected return of a project of size K is [R − s/K ]+ − 1. The total profit is [RK − s]+ − K. The derivative of that with respect to K is Average return Extra chance of no cancelling +∞ +∞ s ¯ s¯ R− dFR − 1 +K dFR . s ¯ K s ¯ K2 K K Tobin’s marginal Q is bigger than 1. Data in a corrupt economy would suggest increasing the scale of investment...
  • 32. Predictions Capital Market The expected return of a project of size K is [R − s/K ]+ − 1. The total profit is [RK − s]+ − K. The derivative of that with respect to K is Average return Extra chance of no cancelling +∞ +∞ s ¯ s¯ R− dFR − 1 +K dFR . s ¯ K s ¯ K2 K K Tobin’s marginal Q is bigger than 1. Data in a corrupt economy would suggest increasing the scale of investment... but increase in scale will only increase the bribe size.
  • 33. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line s
  • 34. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH Inspector’s α choice KL α s
  • 35. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH Inspector’s α choice KL α s s ˆ
  • 36. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH Inspector’s α choice KL α s s ˆ s∗ 1
  • 37. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s Eqm bribe 45◦ line KH Inspector’s α choice KL α s s ˆ s∗ 1
  • 38. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH α Inspector’s choice KL α s
  • 39. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH α Inspector’s choice KL α s s ˆ
  • 40. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH α Inspector’s choice KL α s s∗ s ˆ 2
  • 41. Predictions The Squandering Consider a situation where both restricted and abundance equilibria exist. s 45◦ line KH α Inspector’s choice KL α Eqm bribe s s∗ s ˆ 2
  • 42. Predictions The Squandering What if there is a signal about the investment size?..
  • 43. Predictions The Squandering What if there is a signal about the investment size?.. Say, with probability q the signal is correct (H when investor is of type H and I if investor is of type I).
  • 44. Predictions The Squandering What if there is a signal about the investment size?.. Say, with probability q the signal is correct (H when investor is of type H and I if investor is of type I). Then inspectors will believe their signals if both types of firms start up...
  • 45. Predictions Imperfect Observation What if there is a signal about the investment size?.. s 45◦ line KH α s ˆ KL α s
  • 46. Predictions Imperfect Observation What if there is a signal about the investment size?.. s 45◦ line KH α H signal s ˆ KL L signal α s
  • 47. Predictions Imperfect Observation What if there is a signal about the investment size?.. s 45◦ line KH Bad eqm bribe α H signal s ˆ KL L signal α s
  • 48. Discussion and Conclusion Extensions Private information about returns If investors have a signal about R before investment, almost the same story. If inspectors have a signal about each project, need to be able to convince the investor that he needs to pay higher bribe.
  • 49. Discussion and Conclusion Extensions Private information about returns If investors have a signal about R before investment, almost the same story. If inspectors have a signal about each project, need to be able to convince the investor that he needs to pay higher bribe. Honest inspectors Improve the participation constraint, might invite small businesses. Will let go the “big fish”
  • 50. Discussion and Conclusion Extensions Private information about returns If investors have a signal about R before investment, almost the same story. If inspectors have a signal about each project, need to be able to convince the investor that he needs to pay higher bribe. Honest inspectors Improve the participation constraint, might invite small businesses. Will let go the “big fish” Complaining to superiors Lowers the participation constraint. Does not have to lower the bribe. Total welfare should increase...
  • 51. Discussion and Conclusion Extensions Private information about returns If investors have a signal about R before investment, almost the same story. If inspectors have a signal about each project, need to be able to convince the investor that he needs to pay higher bribe. Honest inspectors Improve the participation constraint, might invite small businesses. Will let go the “big fish” Complaining to superiors Lowers the participation constraint. Does not have to lower the bribe. Total welfare should increase... ...
  • 52. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up.
  • 53. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up. Decentralization creates an inefficiency: bribe-takers cannot coordinate to switch to a better equilibrium.
  • 54. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up. Decentralization creates an inefficiency: bribe-takers cannot coordinate to switch to a better equilibrium. Recovery rate higher ⇒ bribe can go down (does not have to!)
  • 55. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up. Decentralization creates an inefficiency: bribe-takers cannot coordinate to switch to a better equilibrium. Recovery rate higher ⇒ bribe can go down (does not have to!) There are some nontrivial implications for the size and efficiency of government.
  • 56. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up. Decentralization creates an inefficiency: bribe-takers cannot coordinate to switch to a better equilibrium. Recovery rate higher ⇒ bribe can go down (does not have to!) There are some nontrivial implications for the size and efficiency of government. Not rent-seeking.
  • 57. Discussion and Conclusion Conclusion Transfer bribery is not welfare-neutral. It might improve welfare when outside wage is low. It might put the economy in a bad equilibrium, where not all projects start up. Decentralization creates an inefficiency: bribe-takers cannot coordinate to switch to a better equilibrium. Recovery rate higher ⇒ bribe can go down (does not have to!) There are some nontrivial implications for the size and efficiency of government. Not rent-seeking. No strategic complementarities.