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Asymmetric Punishment as an Instrument of Corruption
Control
Karna Basu,* Kaushik Basu** and Tito Cordella**
* Hunter Coll...
The Problem
As citizens we are (or should be) dismayed by corruption
And, emotionally we tend to ask for harsh punishments...
The Economics of Corruption (ii)
Costs and consequences vary by the type of bribe
When a bribe is paid to lower costs, cle...
The Economics of Fighting Corruption
Detecting corruption is particularly hard:
because bribe giver and takers are partner...
Asymmetric Punishment - Harassment Bribes
This paper focuses on “harassment bribes” (extortion)
bribe to receive tax refun...
Our Contribution
We endogenize bribe size and show how it is a¤ected by the structure
of punishment
We endogenize the dete...
This Paper - Setup
Entrepreneur (E) is entitled to receive a license from an o¢ cial
O¢ cial (O) can demand a bribe in exc...
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¢...
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 o...
Bargaining
If a bribe is demanded, bribe size is determined by Nash Bargaining
B arg max
B
[VE (B) DE ] [VO (B) DO ]
Equil...
Comparative Statics
Bribery exists i¤ expected total penalties are su¢ ciently low
pF L DE + DO 2UO
Bribe size
B =
L DE + ...
Bribe size as function of p
BBC (WB) Asymmetric Punishment SITE Conference, 2015 12 / 23
Lessons
Bribery depends on whether total expected penalties are su¢ ciently
large
How penalties are distributed and whethe...
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)
Assu...
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...
Main Result
Under endogenous whistle-blowing:
(i) For k kl :
(a) if L < ¯L, bribery is eliminated;
(b) if L ¯L, there is a...
Summing up
BBC (WB) Asymmetric Punishment SITE Conference, 2015 17 / 23
Observations
Asymmetric punishment e¤ective as a bribery deterrent only if k low
and L low
At other values, asymmetric pun...
Welfare (i)
Policy recommendations depends on SWF
Maximizing total surplus? Not sure
Maximizing entrepreneur surplus? Bett...
Welfare (ii)
If the no bribe outcome entails signi…cant e¢ ciency costs
bribery elimination may be welfare improving for s...
Concluding Thoughts
A …rst step towards thinking about punishment design when bribe size
and detection are set endogenousl...
Concluding Thoughts
Our recommendation: asymmetric punishment for small value
transactions
But not for high value transact...
Thank you!
BBC (WB) Asymmetric Punishment SITE Conference, 2015 23 / 23
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Asymmetric Punishment as an Instrument of Corruption Control

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Presentation by Tito Cordella "Asymmetric Punishment as an Instrument of Corruption Control" at the SITE Corruption Conference, 31 August 2015.

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Asymmetric Punishment as an Instrument of Corruption Control

  1. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 1 / 23
  2. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 2 / 23
  3. 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) BBC (WB) Asymmetric Punishment SITE Conference, 2015 3 / 23
  4. 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) BBC (WB) Asymmetric Punishment SITE Conference, 2015 4 / 23
  5. 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) BBC (WB) Asymmetric Punishment SITE Conference, 2015 5 / 23
  6. 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... BBC (WB) Asymmetric Punishment SITE Conference, 2015 6 / 23
  7. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 7 / 23
  8. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 8 / 23
  9. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 9 / 23
  10. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 10 / 23
  11. 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 ) BBC (WB) Asymmetric Punishment SITE Conference, 2015 11 / 23
  12. 12. Bribe size as function of p BBC (WB) Asymmetric Punishment SITE Conference, 2015 12 / 23
  13. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 13 / 23
  14. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 14 / 23
  15. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 15 / 23
  16. 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). BBC (WB) Asymmetric Punishment SITE Conference, 2015 16 / 23
  17. 17. Summing up BBC (WB) Asymmetric Punishment SITE Conference, 2015 17 / 23
  18. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 18 / 23
  19. 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), BBC (WB) Asymmetric Punishment SITE Conference, 2015 19 / 23
  20. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 20 / 23
  21. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 21 / 23
  22. 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 BBC (WB) Asymmetric Punishment SITE Conference, 2015 22 / 23
  23. 23. Thank you! BBC (WB) Asymmetric Punishment SITE Conference, 2015 23 / 23

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