Economics of Corruption

The word "corruption" is extraordinarily vague, and, in part for that reason, ubiquitous. Charges of corruption are everywhere. Notably, economically booming China is nevertheless said to be seething because of the corruption of local officials, and Chicago's mayor is being questioned by federal investigators about corruption in his otherwise very successful administration.

The problem with the word is twofold. First, identical practices sometimes are "corruption," sometimes not. Second, despite the pejorative connotations of the word, the normative signficance of corruption is not always clear.

Fifty years ago it was common in nightclubs in New York (maybe it still is--I haven't been in a nightclub in New York in 48 years!) to have to give the headwaiter a tip in order to get a table, even if there were many empty tables. This was a form of bribery, but accepted as proper. Management knew about the practice and condoned it. The headwaiters were doubtless paid less than if they had been forbidden to accept these bribes, but that of course was not a clear gain to the nightclub; the nightclub presumably charged customers less because the full cost of the entertainment to them was greater by the amount of the bribe. So far, a wash; but if the bribes induced the headwaiter to be friendlier and more helpful to the clientele, the nightclub was better off. Likewise with tips for waiters and waitresses, despite the possibility that a generous tipper will get better service at the expense of other customers, to the harm of the latter.

So what is wrong with bribing public officials to obtain public services, provided the practice is known and wages are adjusted accordingly? In effect, bribes shift the financing of public services from taxes to a combination of taxes and fees for service. By injecting a market element into public services, bribes can actually improve efficiency when used to get around rigid or inefficient rules. To recur to the 1950s in New York, municipal ordinances forbade contractors doing construction work to obstruct sidewalks and streets, but often it was impossible to do such work without creating at least minor obstruction and so contractors bribed police to look the other way. The net effect on social welfare was probably positive.

But there are several problems that together make bribery of public officials on balance inefficient--and thus "corrupt" in an unequivocally bad sense. First, not all rules are inefficient, and bribes are bad from an economic standpoint when they subvert an efficient rule, as when a building inspector accepts a bribe to overlook a serious fire hazard. Second, without competition among bribe takers (in the New York nightclubs this was secured by the competition among the nightclubs themselves, which limited the amount of bribes that management permitted its headwaiters to receive), the bribe will exceed the cost of the public service being purchased with it, distorting the allocation of resources (though the higher taxes that would be required to compensate public employees who did not have bribe income would also have distortionary effects--all feasible taxes do). Third, delay and uncertainty are created when multiple officials must be bribed. And fourth, a bribery culture reduces pressure to repeal inefficient laws--in fact, it creates in public officials a vested interest in preserving such laws. In that respect, it is a protection racket.

Since public corruption seems on balance inefficient, the question arises why it is so common. The answer is that corruption flourishes where the economy is heavily regulated but the legal framework is weak. The more heavily regulated the economy, the more irksome restrictions there are that will create a demand for methods of avoiding compliance with them, and bribery of the enforcers of the restrictions is one such method. The weaker the legal framework, the more difficult it will be for the government to prevent bribery, a classic "victimless" crime because bribery is a voluntary transaction; and it requires a sophisticated legal machinery to detect and punish such crimes.

There is another and subtler effect of the legal framework. Unless there is an effective machinery for the impartial enforcement of contracts, people will be reluctant to do business with strangers. Economic activity will tend rather to be organized on the basis of familial and other personal relationships. In such a culture it will seem perfectly natural for public officials to exhibit favoritism toward friends and relatives, including persons who purchase their friendship with a generous bribe. Nepotism, clientalism, and bribery become substitutes for contract when the enforcement of contracts is undependable. In contrast, corruption should be rare in a free-market system with courts that enforce contracts honestly and dependably.

So how to explain public corruption in America's big cities today? It seems less common than a half century ago, and perhaps that is because there is somewhat less economic regulation and also a somewhat greater professionalism in civil services, police, and the judiciary. Another factor is that most big cities have Democratic mayors, and the Presidency has been in Republican hands for almost two-thirds of the period since 1969; Republican attorneys-general are more likely to investigate and prosecute public corruption in Democratic-controlled cities than Democratic attorneys-general are. Becker discusses other causes of the decline in U.S. corruption in his comment.

The persistence of corruption in some of our big cities may reflect the presence of immigrant communities in these cities, in which barter and other forms of reciprocal dealing based on (and constructing) relations of trust, extended family relationships, clan ties, and the like continue to organize significant economic activity and make it natural to think of public officials as "selling" public services to their friends and relatives.

The problem of corruption underscores the importance of the legal framework to economic development. An honest, incorruptible police, criminal law enforcement machinery, and judiciary can increase economic efficiency by greatly reducing the amount of corruption (as well as in other ways), though it is equally important to have a commitment to free markets and a workable legislative and regulatory machinery to prevent economic activity from becoming encrusted with inefficient restrictions.