Skip to main content

Should we legalize the act of paying a bribe?

From the website IPaidaBribe.com

A few months ago  I stumbled on Kaushik Basu's fascinating and readable 2011 paper Why, for a Class of Bribes, the Act of Giving a Bribe should be Treated as Legal. In the context of Narendra Modi's massive demonetization campaign, which has as one of its goals a reduction in corruption, I thought it was a timely moment to shine the spotlight on Basu's idea.
One reason that bribery often goes undetected by authorities is that the bribe giver and the bribe taker are incentivized to cooperate with each other in order to keep a bribe secret. After all, the law typically treats both parties as equally guilty—work together and no one gets in trouble. Basu's idea is to upend this symmetry by having the bribe giver face a different set of consequences than the taker should the bribe be made public. Once they face different fates, the motivation that the giver and taker have to cooperate will disappear, or at least be diminished, making it easier for the authorities to cut down on bribery.

In the case of a specific kind of bribery, harassment bribes, Basu proposes completely legalizing the act of giving a bribe while maintaining the prohibition against the taking of a bribe. Harassment bribes are amounts that must be paid to get government services to which one is legally entitled to, say like an official who requires a 'gift' before stamping a document or a teacher who won't correct his/her students' final exams without passing around a hat.

In addition to granting the bribe giver full immunity, Basu also wants to implement a requirement that the taker, once convicted, pay the giver back. So if they successfully offer a bribe and then report it, not only does the bribe giver get the required service that the official had been withholding—they also get the full amount of the bribe returned to them. Knowing that he/she can no longer count on a giver's cooperation post-bribe, the bribe taker will now suspect that all bribes offered and solicited will be made public after the fact by the giver, leading to prosecution. Far safer for the taker to simply stop asking for or accepting bribes.

What about other types of bribes, say like a bribe paid to win a government contract? Here Basu suggests that while the giving of this sort of bribe should not be legalized, the giver should face a more lenient penalty than the taker so as to reduce their motivation to collude.

A policy of allowing bribe givers to tell on bribe takers can backfire, as Basu points out in a more formal paper. Say that a government legalizes the act of giving a bribe, but that the probability of a bribe-giver's information being acted upon by the government is low (perhaps a very high bar for conviction has been set or the department for registering cases of bribery is not sufficiently responsive). In this case, the expected penalty for bribe-taking remains small enough that bribery will not be abolished. Rather, average bribe sizes will rise since government officials will require more compensation to make up for the odds of being detected. Since the same nations that suffer from bribery may be the same ones that fail to run effective departments for taking complaints about bribery and verifying them, the odds of policy failure are not small.

Another problem with this scheme is that it might encourage citizens to blackmail government officials. After all, once a bribe-giver has lured an official into accepting a bribe, he/she can now turn around and tell the official that without some form of compensation, the bribe will be revealed. In response to this, Basu notes wryly that "there is nothing fool-proof in economic policy design," but also suggests increasing the punishment for blackmail.

If the idea of legalizing bribe-giving seems odd on first pass, just think of it as a whistle blowing rule, say like the one recently implemented by the SEC. Whistle-blowing laws are designed to break the psychological incentive for employers to go along with their rule-breaking employees. After all, deviating from an employer-enforced consensus can cause a lot of stress. An offer of financial aid may go some distance to alleviating what is sure to be a difficult experience. In the same way that Basu's legalizing of bribe-giving deputizes bribe givers to come forth and help the authorities pinpoint fraud by government officials, compensation for employees deputizes them to pinpoint corporate fraud.

As I pointed out in this post, Modi's demonetization is a gamble. Sure, it could work out magnificently. But at what cost? With no academic literature documenting the effect of aggressive demonetizations on black market activity, it's hard to know what to expect. While my sense is that the demonetization will probably enjoy some degree of success, a series of incremental changes—including a legalization of bribe-giving (for which their exists a growing body of empirical literature)— would be a far more certain, albeit less dashing, strategy for encouraging growth in the official sectors of developing nations.
Labels:

Comments

Post a Comment

Popular posts from this blog

Stock as a medium of exchange

American Depository Receipt (ADR) for Sony Corp You've heard the story before. It goes something like this. There's one unique good in this world that serves as a universal vehicle by which we conduct every one of our economic transactions. We call this good "money". Quarrels often start over what items get lumped together as money, but paper currency and deposits usually make the grade. If we want to convert the things that we've produced into desirable consumption goods (or long-term savings vehicles like stocks), we need to pass through this intervening "money" medium to get there. This of course is fiction—there never has been an item that served as a universal medium of exchange. Rather, all valuable things serve to some degree or other as a medium of exchange; or, put differently, everything is money. What follows are several examples illustrating this idea. Rather than using currency/deposits as the intervening medium to get to their desired final...
Post a Comment
Read more

Yap stones and the myth of fiat money

At first glance, the large circular discs that circulated on the island of Yap in the South Pacific certainly seem quite odd. Too big to be easily transported, the stones are often seen in photos resting against their owner's houses. So much for velocity. Yap stones have been considered significant enough that they have become a recurring motif in monetary economics. Macroeconomics textbooks, including Baumol & Blinder , Miles & Scott ( pdf ), Stonecash/Gans/King/Mankiw , Williamson , and Taylor all have stories about Yap stone money. Why this fascination? Part of it is probably due to the profession's obsession with the categorical divide between "money" and "non-money". In dividing the universe of goods into these two bins, only a few select goods end up in the money bin. That an object so odd and unwieldy as a three meter wide stone could join slim US dollar bills and easily portable silver coins in the category of money is pleasantly counterintu...
Post a Comment
Read more

Chain splits under a Bitcoin monetary standard

The recent bitcoin chain split got me thinking again about bitcoin-as-money, specifically as a unit of account . If bitcoin were to serve as a major pricing unit for commerce on the internet, we'd have to get used to some very strange macroeconomic effects every time a chain split occurred. In this post I investigate what this would look like. While true believers claim that bitcoin's destiny is to replace the U.S. dollar, bitcoin has a long way to go. For one, it hasn't yet become a generally-accepted medium of exchange. People who own it are too afraid to spend it lest they miss out on the next boom in its price, and would-be recipients are too shy to accept it given its incredible volatility. So usage of bitcoin has been confined to a very narrow range of transactions. But let's say that down the road bitcoin does become a generally-accepted medium of exchange. The next stage to becoming a full fledged currency like the U.S. dollar involves becoming a unit of account...
Post a Comment
Read more