Anticorruption and the Design of Institutions 2013/14. Lecture 6. Disorganized Corruption. Prof. Dr. Johann Graf Lambsdorff

Transcription

1 Anticorruption and the Design of Institutions 2013/14 Lecture 6 Disorganized Corruption Prof. Dr. Johann Graf Lambsdorff

2 Literature Olken, B. and P. Barron (2009) The Simple Economics of Extortion: Evidence from Trucking in Aceh, Journal of Political Economy, Vol. 117 (3): Olson, M. (1993), "Dictatorship, Democracy, and Development," The American Political Science Review, Vol. 87(3): Shleifer, A. and R.W. Vishny (1993), Corruption. Quarterly Journal of Economics, Vol. 108:

3 Disorganized Corruption Businesspeople might sometimes be confronted with many public servants extorting payments. For example, setting up a new business may require various permits, none of them can be missed. The organization of these multiple payments becomes a daunting task. Shleifer and Vishny [1993] model this situation: In Russia private investors negotiate with various departments (fire, police, banks...), each of them requesting a payment in exchange for the speedy approval of a business license. This leads to the overgrazing of the corrupt marketplace. 147

4 Disorganized Corruption The problem is comparable to road bandits. Optimal income for road bandits requires a limit on their activity, so as to avoid that too many travelers are scared off. Taking, for example, only 20% of the traveler s money may be best. But competition among road bandits destroys this calculus: Any money not confiscated will be taken by others. In this spirit, investors prefer to deal with only one extortionist. Parker and Hart, June

5 Disorganized Corruption Assume that there is a total number of n symmetric departments (i, i=1, 2,..., n) requesting a percentage (b i ) of the investment (X). The costs for dealing with this payment, providing the corrupt service and obfuscating are cb i, 0<c<1. Investments (X) decrease with the total amount of extortions, X=X(b 1 +b b n ), dx/db i <0. Each department s profit (P i ) is given by P i =b i X-cb i X. Let us assume that the departments are controlled by a strong party (a monopoly), which maximizes total income of all departments. In this case, they are all forced to behave symmetrically (b 1 =b 2 =...=b n ), resulting in P i =(1-c)b i X(nb i ). 149

6 Disorganized Corruption Profit is maximized in the monopoly case if: d d Pi dx c X c bi n bi dbi After the breakdown of the party the departments start to maximize their income individually, each considering the other departments not to react to their own level of pay-off. Profit maximization is carried out individually by the departments, resulting in: d d (1 ) (1 ) 0 Pi dx c X c bi bi dbi (1 ) (1 ) 0 The second term is no longer multiplied by n. Therefore, a higher bi is needed to satisfy the equation. This is what is known as an overgrazing effect. The optimum level of total extortion payments collected (which was determined in the monopoly case) is missed, because individual extortionary requests are too high. 150

7 A Case Study The propositions of this model have been tested by Olken and Barron (2009). The authors study extortions payments paid by lorry drivers along two main roads in Aceh, an Indonesian province where separatist guerrillas had long been active. Over nine months in 2005 and 2006, data gatherers accompanied the truckers on 304 trips to and from Aceh, recording more than 6,000 illegal pay-offs at military roadblocks, police checkpoints and weigh stations. During the 637-kilometre (396-mile) trip from Medan to Meulaboh drivers typically passed through 27 checkpoints. 151

8 A Case Study 152

9 A Case Study 153

10 A Case Study In the early stages of each trip, transactions were typically conducted without negotiation at each stop, drivers simply handed over a few thousand rupiah ($0.50 to $1.00) or a couple of packs of cigarettes. As the trucks neared their destination, however, checkpoint officials demanded increasingly larger sums. At each stop, drivers found themselves with a progressively stronger incentive to avoid hassle and safeguard their cargo, which gave the extortionists greater power over them. Midway through the study, after the Indonesian government had signed a cease-fire with the rebels, it began a phased withdrawal of 30,000 troops, leading to the number of checkpoints in Aceh to fall. The number of checkpoints in North Sumatra remained unchanged. 154

11 A Case Study Fig. 3 Impact of Troop withdrawals. Each observation is a trip. Dots in the left column show the number of checkpoints encountered on the trip in Aceh prince; crosses in the left column show the number of checkpoints encountered on the trip in North Sumatra province. Boxes in the right column show the log of total payments made in North Sumatra province, including payments at weigh stations. The solid line indicates the number of troops and police stationed in Aceh province at the time the trip began in the districts through which the trip passes. 155

12 A Case Study The amount lost to extortion decreased but only by 36%. Fewer stops meant less frequent extortion, but this was offset by a rise in the amounts demanded at the remaining checkpoints, whose operators, with entrepreneurial zeal, seized the chance to capture part of the newly liberated surplus. They behaved like monopolists, setting their prices so as to maximize their own revenue, without considering the response of the fellow at the next checkpoint, or whether their activities would deter truckers. With fewer checkpoints extortion payments could have been raised so as to keep total corrupt income equal. But in fact total income from extortion was reduced, which can be referred to the idea that at each checkpoint they start to recognize how their extortion deters truck drivers. 156

13 Pros and Cons of Disorganized Corruption Is disorganized corruption better or worse than organized corruption? This question can be posed more provocative: Should we help extortionists to better organize their illegal business? Yes: The model predicts that disorganized corruption is worse. No: Often there exist legal alternatives to being extorted. Disorganized extortion is more costly and induces some actors to prefer the legal alternative. Once corruption is organized, it becomes deeply embedded in a country and widely accepted as the only way for doing business. The model fails in recognizing such legal alternatives such as complaints mechanisms. 157

14 Pros and Cons of Disorganized Corruption This can be illustrated by the following game in extensive form. B extorts a payment by requesting to share a joint surplus of 12. E chooses between making the payment or complaining and thus resisting the payment, yielding a payoff of 5 (and a positive social externality of 10, denoted by the logo of doctors without borders ). Nature then tosses a coin that determines whether extortion is organized or disorganized. The latter implies that E and B must share their surplus again with others (the effect of E withdrawing from the market is disregarded here). Complaining is the dominant strategy. 158

15 Pros and Cons of Disorganized Corruption (0; 5) B Extort payment Complain N Extortion disorganized (2; 2) E Pay Extortion organized (6; 6) But if the risk of a disorganized extortion is deleted, making the payment is dominant. The bad outcome of disorganized extortion can have superior welfare repercussions. 159

16 Appendix Discussions 1) Why may a disorganized form of corruption be worse than an organized form, for investors and public servants alike; in how far may independent departments overgraze the market when extorting payments? 160

17 Exercise: There is a total number of 4 symmetric departments (i, i=1, 2, 3, 4) requesting a percentage (b i ) of the investment (X). Costs for providing and obfuscating are cb i with c=0.5. Investments decrease with the total amount of extortion, X bi i 1 a) The departments jointly maximize total income. Determine the resulting investment! b) The departments maximize their income individually, each considering the other departments not to react to their own level of pay-off. Determine the resulting level of investment! c) A powerful kleptocrat may unite the departments, but one type of welfare loss becomes particularly strong and unavoidable. Describe this type of welfare loss! 161