Jobs in the Bureaucratic Afterlife: A Corruption-Facilitating Mechanism Associated with Law Enforcement.

• Author: Cho, Joonmo
• Position: Statistical Data Included

Joonmo Cho [*]

Iljoong Kimt [+]

This article starts with an observation that the employment of former regulatory officers by a regulated firm might be an integral part of the corruption-facilitating mechanism (CFM). The article hypothesizes that such employment constitutes the deferred payment for the corruption previously supplied. Although anecdotal evidence of this kind of corruption abounds, it has proven difficult to substantiate. The article provides an explanation for why this deferred payment arrangement might be attractive to both demanders and suppliers of corruption. It also offers tentative empirical support for the hypothesis that it plays a role as CFM in Korea, with the implication that this CFM hypothesis can be generalized to a host of regulatory countries.

1. Introduction

   According to a report that the Berlin-based Transparency International (TI 1997) published before the onset of the Korean economic crisis, Korea did not fare as well as during the previous year in TI's annual country rankings concerning the prevalence of corruption in society. The TI Corruption Perception Index (CPI), which measured corruption in public life in particular, put Korea in 34th place, down seven places from the previous year, and Korea's ranking has not improved since.

   The essential insight that the economic models of the law enforcement process offer is that corruption comprises the implementation of government regulations since the returns realized by law enforcers in exchange for supplying corruption exceed the costs. The ability of the legislature and the general public to monitor the discretionary implementation by law enforcers is naturally limited (Benson 1988).

   This article, from the perspective of the economic theory of regulation (McChesney 1997), focuses on corruption mainly as it occurs during the enforcement of regulation. We argue that the employment of former regulatory officers by a regulated firm is a widespread practice, an integral part of the corruption-facilitating mechanism (CFM) in Korea. This means that job turnover of ex-bureaucrats from a regulatory agency into the regulated firm is not only determined based on their expertise but is also the source of irregularities and corruption. Although anecdotal evidence of this kind of corruption abounds, it has proven difficult to substantiate. The article therefore starts by providing an explanation of why this deferred payment arrangement might be attractive to both demanders and suppliers of corruption. The article finishes with tentative empirical support for the hypothesis that it plays a role in stably facilitating corruption in Korea.

   The order of the article is as follows. Section 2 explains why the labor market for ex-bureaucrats may function as part of a corruption mechanism. It emphasizes that employment of government retirees results from their regulation-specific human capital or, in particular, the realization of deferred payment for the corruption services during their terms in government. Unfortunately, it has been almost impossible for a third party to separate one case from the other. Yet we submit in this section that there indeed exists such a test. Specifically, we elaborate on a differing-tenure hypothesis that, if the bureaucrats are merely hired to pay them for the pork provided while in office, then the tenures at the first job after retirement will be shorter ceteris paribus. This is because they would be hired just long enough to pay for the pork. Section 3, as ground work for our further empirical inquiry later, investigates general determinants of the turnover probability of those moving into regulated firms with a da ta set consisting of ex-bureaucrats in Korea. As the first systematic empirical analysis of postgovernment career paths in the context of a corruption mechanism, section 4 formally tests the CFM hypothesis: employment of the ex-bureaucrats by the regulated firms is a form of deferred compensation for corruption supplied. We first empirically verify the differing-tenure hypothesis using the hazard estimation. Subsequently, the job turnover probability model of section 3 is reestimated with the average of the first job tenures by agency included as a proxy to indicate the degree of corruption. We then show that the proxy reasonably supports our CFM hypothesis. Finally, section 5 concludes this article by reviewing implications for future policy for Korea. We, however, firmly believe that the implications of the CFM hypothesis are relevant not only to Korea but that they can be generalized to a host of countries.

2. Labor Market for Ex-Bureaucrats as CFM

   Bureaucratic Corruption and Forms of Rewards

   In exchange for supplying corruption, [1] regulatory officers can selectively obtain various types of benefits in an effort to maximize their utility. The first conceivable type is the bribe, considered in most relevant studies as the price of corruption. [2]

   While the bribe is most common, pecuniary compensation is by no means the only benefit from supplying corruption. [3] Another attractive form is a guarantee of employment after the corruption supplier no longer remains on the government payroll. There appear to be several reasons why a supplier might prefer this "deferred payment" to a direct bribe.

   Supply-Side Incentives to Prefer Deferred Payment

   First, since a bribe is relatively easier to detect than a deferred payment, the expected penalty (probability of detection X degree of penalty) is lower for the latter. A bribe is obviously a payoff for corruption, so if it is observed, it is strong evidence. Furthermore, the direct bribe can be detected by looking at financial records. Thus, the transaction costs of avoiding detection are relatively high. [4] After all, a deferred payment is masked as legitimate employment. A person may be employed by a regulated firm because of the expertise he has gained as a bureaucrat. Simply observing the employment is not proof of corruption. There has to be actual evidence of the corrupt act, too. [5]

   Second, the expected penalty for the corruption provided during terms at the regulatory agency tends to be alleviated if the accused is retired when the illegal activity is discovered. Bureaucrats would naturally prefer a deferred payment due to the lower severity of penalty. Additionally, there exists anecdotal evidence that individuals who expect to he accused retire in order to avoid accusation. Once an individual is retired, the internal policing arrangements that characterize many bureaucracies are not likely to accuse him, and the person's public reputation is thus not tarnished. Therefore, combined with the first reason above, the suppliers may prefer their payments to be deferred until they retire ceteris paribus. [6]

   Third, securing employment after retirement may be important because work in and of itself offers various kinds of utility. For many people, working for a major company can be a source of social prestige or honor. [7] It is also a prerequisite for membership in informal but exclusive circles (Tullock 1965; Breton and Wintrobe 1982) through which former bureaucratic elites maintain lifetime connections. Of course, others in the network might not know why the corruption supplier actually got the job. Perhaps some of them might be corruption suppliers themselves.

   Demand-Side Incentives to Prefer Deferred Payments

   To be sure, there are also reasons why the demanders of corruption prefer deferred payment. First and most importantly, like the supply side above, the likelihood of detecting the corrupt transaction is reduced by a deferred payment.

   Second, a guarantee of employment through a deferred payment contract may facilitate goal congruence between the demanders and suppliers. This will particularly be the case when the benefits the demander receives accrue over some time interval, say, after the retirement of the supplier. An appropriately designed contract that maintains a longer relationship might induce the bureaucrats to approximate the contents of corrupt activities the demander wants. Essentially, providing employment rather than a lump sum bribe can be understood as a preventative measure like the hostage situation (Williamson 1983) against postcontractual opportunism by the supplier of corruption. [8]

   Third, to the extent that the bribe the supplier receives is contingent upon the overall profitability of the corruption, the demander may use the long-term employment contract as a way to distribute risk to the supplier. Also, it may circumvent the possibility of the supplier leaking information to rival firms. [9]

   It is important to note that, to the extent that the demanders may prefer such delayed compensation, they actually may pay more for corruption if the supplier agrees to it. Even if the supply-side arguments were not completely convincing in some situations, the increased price through deferred compensation would still induce suppliers to opt for it. In sum, this article addresses the labor market for retired bureaucrats, particularly as part of CFM. [10]

   Demand for Ex-Bureaucrats and the Sustainable CFM

   A desire to work after retirement is not enough for job matching. Ex-bureaucrats are in high demand among private sector employers for the following reasons. First, ex-bureaucrats possess both innate basic abilities (general human capital) and industry-specific expertise (specific human capital), making them uniquely qualified as specialists (5) in specific fields of regulation. The expertise includes, for instance, in the case of the Ministry of Information and Telecommunications, knowledge of the domestic information and telecommunications industry, recognition of worldwide regulatory trends, interpretation of specific regulatory clauses, analysis of sophisticated data, etc.

   Ex-bureaucrats may possess considerable lobbying capital (L). Registered lobbyists are not allowed in Korea. The lobbying capital of ex-bureaucrats...