Legalization of Bribe Giving when Bribe Type Is Endogenous

• Published date: 01 August 2015
• Date: 01 August 2015
• Author: MANDAR OAK
• DOI: http://doi.org/10.1111/jpet.12149

LEGALIZATION OF BRIBE GIVING WHEN BRIBE TYPE

ISENDOGENOUS

MANDAR OAK

University of Adelaide

Abstract

A recent paper, Basu argues that for a class of bribes, called

harassment bribes, legalization of bribe giving, but not bribe

taking, will reduce bribery. We examine the applicability of

Basu’s insight in an environment in which the type of the

bribe—harassment or nonharassment—is endogenously deter-

mined, and it is not feasible to legalize the giving of nonha-

rassment bribes. We find that in such an environment Basu’s

proposal, in and of itself, yields mixed results: in one case it

reduces even the prevalence of nonharassment bribes, and

improves social welfare. However, in another case it is shown

to be counter-productive, i.e., it reduces social welfare while

failing to eliminate bribery. Our analysis finds parameter val-

ues that determine which of the two cases will prevail, and

points to additional policies aimed at strengthening the le-

gal institutions which, in conjunction with Basu’s proposal,

will help reduce bribery.

1. Introduction

Bureaucrats demanding bribes in exchange for granting of licenses, permits,

and various kinds of project approvals is a common phenomenon in many

poorly governed societies. There is a large literature in economics studying

various aspects of the practice of bribery as well as the general phenomenon

Mandar Oak, School of Economics, University of Adelaide, Level 3, 10 Pulteney Street,

Adelaide SA 5005, Australia (mandar.p.oak@gmail.com).

I am particularly grateful to Kaushik Basu for his valuable comments. Thanks also to

Pramod Chaudhury, Charan Singh, Arvind Virmani, the seminar attendees at ISB – Hyder-

abad, UniSA, and Uni Adelaide, conference participants at ESAM 2013 (Sydney), and to

the Indian Institute of Management, Bangalore, for their hospitality. The usual disclaimer

applies.

Received November 9, 2014; Accepted November 29, 2014.

C2015 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 17 (4), 2015, pp. 580–604.

580

Legalization of Bribe Giving 581

of corruption.1A recent thought-provoking paper, Basu (2011), argues that

the problem of bribery can be solved by its partial legalization, in particular

by making it legal to give a bribe but not to receive it. Basu’s argument is

simple, yet persuasive. When the acts of giving as well as receiving a bribe are

illegal, both the giver and the receiver have an incentive to conceal evidence

regarding the act of bribery, making it hard for authorities to prosecute due

to a lack of credible evidence. If bribe giving were decriminalized and its

disclosure rewarded, then the bribe giver, after getting his project approval

in exchange for a bribe, will proceed to disclose evidence that a bribe had

been paid. The prospect of such action on part of the giver will deter the

bureaucrat from demanding a bribe in the first place.

Basu limits his proposal to a class of bribes he calls harassment bribes.A

harassment bribe is one that is paid to get approval for a project that is com-

pliant with the legal requirements and therefore entitles the applicant to

undertake it.2In such cases a bribe is demanded because the bureaucrat

controls the approval process and can therefore extract rents. Hence it can

be said, unambiguously, that the applicant is a victim, and the bureaucrat a

perpetrator.

However, there is another class of bribes, namely nonharassment bribes.3

These are bribes exchanged in return for approval of noncompliant projects,

i.e., projects which, while in the private interest of the applicant, may be

detrimental to social welfare. In such cases the bribe-paying applicant is

not a victim, but rather a co-perpetrator along with the receiver. Basu re-

marks that, for this very reason, his proposal should not be extended to

nonharassment bribes, even if, solely in terms of deterring bribery, it is

equally effective in these cases.

In this paper, we further explore the coexistence of these two classes

of bribery and its implications for the efficacy of Basu’s proposal. We argue

that there are cases where the distinction between harassment and nonha-

rassment bribes is not only murky, but also endogenous. When that is the

case, one has to analyze the implications of Basu’s proposal on the strategic

project choice as well as the decision to offer and receive bribes.

Consider the following example, which is illustrative of the type of situ-

ations we are interested in studying. Suppose that an entrepreneur wants to

set up a manufacturing plant at particular site. Before the plant is made oper-

ational, a set clearances needs to be obtained from the relevant authorities to

ensure that various compliance standards pertaining to such factors as design

safety and environmental impact mitigation have been complied with. The

1For a recent survey, see Olken and Pande (2012).

2We use the term “project” generically.It encompasses activities such as getting a passport

or an export permit or bidding in a procurement contract as well as business projects in

the usual sense of the term.

3In the literature, these are referred to as collusive bribes, while the harassment bribes are

referred to as extortionary bribes.