Wednesday, December 14, 2016

Should we legalize the act of paying a bribe?

From the website

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. By removing the symmetry of a bribe transaction,  the profit and loss calculus faced by the bribe giver is dramatically altered. 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.

It also alters the calculus faced by the taker. 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. Far safer 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.


  1. This asymmetric punishment was actually the norm in the West and in the US until about 200 years ago. Nicholas Parrillo of Yale Law has a great book on this "Against the Profit Motive: The Salary Revolution in American Government, 1780-1940." For one thing, most government officials back in the day didn't earn a salary at all, all payments were fees (what we'd call bribes), and more often than not the fee schedule was purely determined by what the official wanted and the market would bear, say how much an official could demand for a customs inspection or legal filing or land title. Even when there was some statutory or customary limit on the "fees" officials could demand, most courts understood it was no problem for private customers to offer tips or "gratuities" to speed service. The only real legal issue that concerned most officials was "extortion," which meant some deceptive or outlandish or overweening demand for fees. Private citizens of course could only be victims of extortion not participants in it. In the 19th century, however, there was more concern with private individuals "corrupting" officials away from their duties with excessive tips and fees, and it became harder to decide more abstract public interest duties based on some kind of fee schedules (how much land should an official give away in the West? How many immigrants should an official admit?) So all public officials were eventually put on salary and "bribery" (once a minor crime involving certain payments to judges) as well as extortion became illegal. It wasn't until the early 20th century, however, that this became near universal in the US public service.

    1. Judge, interesting comment.

      Seems sort of like tax farming?

    2. Yes, tax farming was one example, although as Parillo points out, tax farming was more like a "bounty" where officials got a cut for raising money for the state, as opposed to a fee to provide a certain service. But the basic principle was definitely the same.

  2. Would this mean the government officials receiving the bribe will be more dependent on the bribe giver? Because their fate is in the hands of the bribe giver and the bribe giver can strong-arm the government official if he/she refuses to take the next bribe. So the receiver must continue cooperate and getting the bribes.