By Avinash Dixit (Princeton University)

How should a country fight corruption? Most people would answer that the government should make and enforce strong laws against it. But further thinking should show that this approach won’t get far. The politicians who make laws, and the officials who enforce them, all stand to benefit from the prevailing corrupt system. One cannot expect them to go against their strong self-interest. They will make weak laws with loopholes; their enforcement will be lax and itself riddled with corruption. At a minimum, formal legal avenues must be supplemented by participatory and organized efforts of the losers – citizens. Participatory because mere voting is not enough; even if a corrupt government is voted out, the new one will act with the implicit motto: “It is now our turn to eat”. Organized because any one citizen or firm is helpless when a politician or official demands a bribe, but collectively they have a lot of power. The question is how to harness it effectively.

This is a prisoners’ dilemma for consumers and businesses. If no one else is giving bribes, you improve your chances by bribery; if everyone else is complicit in bribery, you will only hurt yourself if you refrain. So bribery is the dominant strategy for all. But when everyone chooses it, in the aggregate they merely cancel one another’s actions and transfer money to politicians and officials. Social scientists have observed and theorized about numerous ways to resolve prisoners’ dilemmas using bottom-up, self-enforcing strategies. We can deploy this knowledge and experience to devise community-based action against corruption.

We know that successful collective action to resolve prisoners’ dilemmas requires: (1) a group with stable ongoing relationships, (2) common knowledge of what constitutes cooperation and cheating, (3) common knowledge of the sanctions to be imposed on cheaters, (4) good detection of cheating, (5) good communication of incidents of cheating to all participants, (6) incentives for members to take their designated action to punish a cheater.[1]

A business community can establish a “no bribery” norm and enforce it using the sanction that anyone found violating it would be ostracized by the others, which would cut him/her off from all the interactions – contracts, supply chains, finance and so on – that any business needs to function in today’s economies.

Let us see how this meets the desiderata listed above.[2]

(1) The community should have some organized structure such as a Chamber of Commerce, which a business is required to join in order to benefit from networking and trade relations, or be on a list qualified to bid for government business.

(2) Members must pledge not to attempt bribery to win any government contracts or licenses or to influence the decisions of regulators, legislators, and courts.

(3) Any member found violating the norm is subject to ostracism by others. This means cutting off business contacts, but can also include social ostracism if the Chamber has a social branch where the families of businesspeople meet. No one wants their spouses and children excluded from social activities of friends, so this threat can be very effective. But experience shows that sanctions should be graduated, not drastic ones triggered by small infractions; therefore violations especially by new and small members should be met first with warnings, and escalate to full ostracism only if they persist.

(4) The Chamber should have a good gossip network, and contacts with media and officials, that enable it to sniff out corruption, and a tribunal that can investigate suspicions or allegations of corruption. This can be supplemented by a more formal research unit that gives ratings to firms for their clean or corrupt behavior, similar to the Michelin star ratings for restaurants. It is extremely important to avoid false accusations, under severe penalties against anyone found making them. It is also important that the tribunal is not perceived as an insiders’ club that serves to exclude newcomers. A broad outside representation of respected senior retired businesspeople, public figures, media personnel, and academics should oversee the working of the tribunal.

(5) The name and picture of anyone convicted of violating the norms should be publicized widely, as done by the famous New York Diamond Merchants’ Club.[3]

(6) A system like the Honor Codes against cheating that exist in some universities, where refusing to report a violation is itself a violation requiring similar sanction, can create an incentive to take part in the ostracism of a convicted briber. But more than that: If A is ostracized by everyone and invites B to deal with him, B knows that A has nothing worse to fear by cheating in their interaction, and therefore that he must give up a bigger share of the available joint profit or rent to A to keep him honest. In other words, it is more costly to deal with a convicted briber than with someone who has a clean record.

The prisoners’ dilemma view of corruption can be supplemented by a coordination game.[4] Societies have two kinds of equilibria, one where everyone is corrupt and that is just an accepted state of affairs, and another with a clean culture where corruption is shameful and rare. How to shift from a corrupt to a clean equilibrium? Try harnessing the idealism of youth. Everywhere the young, especially the best educated and most enterprising, want their country to be modern and corruption-free. Other things reasonably equal, they prefer to work for, and buy from, firms with good governance and ethical behavior. A movement that channels these preferences into action can create an environment in which such clean firms attract the best talent, are favored by consumers, and therefore are more profitable; this builds momentum for more and more firms to eschew corruption. Indeed, such an organization is having some success in Sicily to fight the Mafia’s extortion; bureaucrats should be easier to counter.[5]

I am not claiming that such organizations or movements will successfully eliminate corruption everywhere, or quickly, or completely. But corruption is such an obstacle to development that even a little success is worth having. Nothing else has worked at all well. Waiting for a 100% effective solution only ensures getting 0% progress.[6]

Suggestions for further reading

Transparency International, (2016); The Benefits of Anti-Corruption and Corporate Transparency.  Working Paper #01/2016.

Mungiu-Pippidi, A. (2015); The Quest for Good Governance: How Societies Develop Control of Corruption. Cambridge University Press.

Basu, K., and T. Cordella (eds). (2018); Institutions, Governance, and the Control of Corruption, Palgrave Macmillan.

References

Bernstein, L., (1992); “Opting out of the legal system: Extralegal contractual relations in the diamond industry.” Journal of Legal Studies, 21(1), 115–57.

Dixit, A., (2004); Lawlessness and Economics: Alternative Modes of Governance, Princeton University Press.

Dixit, A., (2017); “Fighting corruption by altering the equilibrium in an assurance game.” working paper, November 2017, available at http://www.princeton.edu/~dixitak/home/wrkps.html

Dixit, A., (2018); “Anti-Corruption Institutions: Some History and Theory.” Published in K. Basu and T. Cordella, (eds.) Institutions, Governance, and the Control of Corruption, Palgrave Macmillan, pp. 15-49.

Dixit, A. and R. Mankar (2018); “New ideas for fighting corruption in India,” LiveMint, April 23, 2018, https://www.livemint.com/Opinion/mxVdMVeQUBEfoJWmY0scRL/New-ideas-for-fighting-corruption-in-India.html .

Dugatkin, L., (1999); Cheating Monkeys and Citizen Bees: The Nature of Cooperation in Animals and Humans, Harvard University Press, 1999

Greif, A., (2006); Institutions and the Path to the Modern Economy: Lessons from Medieval Trade, Cambridge University Press.

Jacobson, P., (2014); “Addiopizzo: The Grassroots Campaign Making Life Hell for the Sicilian Mafia,” Newsweek, September 17, 2014.

Ostrom, E., (2015); Governing the Commons: Evolution of Institutions for Collective Action, Cambridge University Press, Canto Classics reissue.

Superti, C., (2009); “Addiopizzo: Can a Label Defeat the Mafia?” Journal of International Policy Solutions, 11, Spring 2009 3-11.

Endnotes

[1] This list derives from studies and meta-analyses of many prisoners’ dilemmas of collective action: common resource pool problems (most notably Ostrom 2015), contract enforcement (for example Greif 2006, and Dixit 2004), and socio-biology (for example Dugatkin, 1999), to cite just a few.

[2] For more detailed arguments see Dixit (2018).

[3] See Bernstein (1992).

[4] A model with supporting evidence is in Dixit (2017).

[5] See Superti (2009) and Jacobson (2014).

[6] An OpEd offers a starter attempt to implement these ideas in India: Dixit and Mankar (2018).

By Eric Alston (University of Colorado Boulder), Lee Alston (Indiana University Bloomington), Bernardo Mueller (University of Brasilia), and Tomas Nonnenmacher (Allegheny College, Pennsylvania)

Today, the notion that “institutions matter” is broadly accepted.  Scholars have generated a rich literature on the causes and effects of institutions spanning from the micro to the macro level. The pioneering work of Buchanan, Coase, North, Ostrom, Williamson, and many others is the fertile soil in which the literature in Institutional and Organizational Analysis (IOA) has taken root and blossomed. There is a wealth of institutional scholarship that now spans disciplines, decades, and continents. Our 2018 book with Cambridge University Press, Institutional and Organizational Analysis: Concepts and Applications, expands on many of the major contributions in this area, organized within a framework that explains both the effects and determinants of institutions and norms.

Our book is centered on the insight that institutions and norms are fundamental determinants of economic and political development. Institutions are rules that recognized authorities create, and choose whether or not to enforce. Norms are long-standing patterns of behavior, shared by a subset of people in a society or organization. Institutions and norms play a role in all organizations, including governments, firms, churches, universities, gangs, and even families. In our book, we (1) present a set of concepts—for example, institutions, norms, property rights, and transaction costs—used in IOA that link institutions and norms to economic performance; (2) use the same set of concepts to better understand political organizations and performance; and (3) build a framework based on those concepts for understanding divergent developmental trajectories of nations around the world. In Parts I and II, we define the concepts needed to understand how economic activity is organized and how institutions and norms shape economic and political outcomes. In Part III, we add the comparatively recent work on beliefs and leadership to better understand the fundamental question of why there has not been convergence in economic and political performance across countries. In the following paragraphs, we summarize the three parts of our book in greater detail, which is intended as a useful reference for advanced students and scholars alike.

In Part I of the book, we link institutions to property rights, transaction costs, and economic performance. In Chapter 1, we examine how institutions and norms shape property rights. Property is a social construct; that is, property rights define our ability to use different aspects of an asset. In Chapter 2, we define transaction costs as the costs of “transfer, capture, and protection” of property rights. Transaction costs are a key determinant of organizational and contractual choice. In Chapter 3, we analyze how different types of transaction costs shape the structure of contracts and organizations. The price mechanism and hierarchies can be thought of as endpoints on a spectrum of contractual choices, and we provide a theoretical justification for and examples of different intermediary forms.

In Part II, we explain the determinants of institutions taking as fixed the basic constitutional rules and current economic performance. In the four chapters, we analyze the process through which groups and individuals lobby and government supplies laws and regulations. In Chapter 4, we address the role and impact of interest groups on government policy. Every policy is potentially redistributive, so firms and individuals organize to influence redistribution in their favor. In Chapter 5, we assess the roles of the legislature and the executive as the organizations in charge of creating and implementing legislation. In Chapter 6, we address the role of the bureaucracy and its impacts on the content, quality, and effectiveness of the outcomes of laws. In Chapter 7, we analyze how institutions can influence the structure and output of the judiciary. We also examine the impact that judiciaries have on institutions and norms.

Simple economics suggest that countries should have converged in terms of economic and political development. Moreover, scholars in the IOA have spilled a lot of ink in showing the socially beneficial institutions that accompany development. But despite an increasingly well-known institutional template, countries have not converged in terms of economic and political development and, in many cases, have outright declined. A number of explanations to this puzzle have emerged: (1) it is not in the interest of those in power to have economic and political development; (2) poorer countries have not converged because the volatility of their growth rates means such economies are as likely to shrink as grow; and (3) a change in fundamental core beliefs about how institutions affect outcomes is required to break out of the status quo. In Part III, we discuss the role of core beliefs and leadership in bringing about changes to constitutional-level institutions. Though we do not directly analyze culture or ideas as a determinant, we recognize their importance as background conditions that determine which belief changes take place. We stress leadership for its coordinative function within a dominant network that is negotiating how to respond to either an existing shock or a foreseeable crisis that could be attenuated or avoided, provided sufficient institutional change occurs.

Further, we identify fruitful avenues for research within each of our referential frames of institutional and organizational analysis, from the economic to the political to the constitutional. Our text provides useful background for the future areas of research we suggest by laying out many of the foundational contributions of the emerging discipline. It is our hope that the text will serve as a resource in helping to define the still emerging field of IOA. Our book is relevant for advanced undergraduates, as well as a valuable reference for graduate students and scholars. The analysis of the emergence and evolution of complex rule sets has proven to be one of the most illuminating areas of economic study over the course of the past century, and we accordingly describe how much more we think the field has to contribute.