Organizational Cultures of Corruption

• Published date: 01 February 2017
• Date: 01 February 2017
• DOI: http://doi.org/10.1111/jpet.12174

ORGANIZATIONAL CULTURES OF CORRUPTION

PATRICK SCHNEIDER

University of New South Wales

GAUTAM BOSE

University of New South Wales

Abstract

Systematic differences in the incidence of corruption between coun-

tries can be explained by models of coordination failure that suggest

that corruption can only be reduced by a “big push” across an entire

economy. However, there is significant evidence that corruption is of-

ten sustained as an organizational culture, and can be combated with

targeted effort in individual organizations one at a time. In this paper,

we propose a model that reconciles these two theories of corruption.

We explore a model of corruption with two principal elements. First,

agents suffer a moral cost if their corruption behavior diverges from the

level they perceive to be the social norm; second, the perception of the

norm is imperfect; it gives more weight to the behavior of colleagues

with whom the agent interacts regularly. This leads to the possibility

that different organizations within the same country may stabilize at

widely different levels of corruption. Furthermore, the level of corrup-

tion in an organization is persistent, implying that some organizations

may have established internal “cultures” of corruption. The organiza-

tional foci are determined primarily by the opportunities and (moral)

costs of corruption. Depending on the values of these parameters, the

degree of corruption across departments may be relatively uniform or

widely dispersed.

These results also explain another surprising empirical observation:

that in different countries similar government departments such as tax

and education rank very differently relative to each other in the ex-

tent to which they are corrupt. This is difficult to explain in incentive-

based models if similar departments face similar incentives in different

countries.

Patrick Schneider, University of New South Wales,Sydney, Australia (schneider.patrick.m@gmail.com).

Gautam Bose, University of New South Wales, Sydney,Australia (g.bose@unsw.edu.au).

This paper is partly based on Schneider’s undergraduate honors thesis submitted to UNSW. We are

indebted to Zhanar Akhmetova, Ariel Ben Yishay, Richard Holden, Hodaka Morita, and Alberto Motta

for comments at various stages of this project.

Received October 19, 2013; Accepted September 1, 2015.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 19 (1), 2017, pp. 59–80.

59

60 Journal of Public Economic Theory

1. Introduction

Levels of corruption differ significantly between countries.1Coordination models pro-

vide a standard way to explain such differences and suggest that anticorruption efforts

should involve “big-push” policies that ensure all agents shift expectations and behavior

simultaneously to the desirable equilibrium (see, e.g., Andvig and Moene 1990, and the

references therein; Murphy, Shleifer, and Vishny 1993; Nabin and Bose 2008). The per-

sistence and pervasiveness of corruption in some countries coupled with its systematic

absence in others strongly support the insights of coordination models.

Corrupt practices also vary substantially across different regions or organizations

within individual countries. This within-country variation can be explained at the level

of organizations, with differences in corruption caused by differing incentives or man-

agement regimes and exacerbated by selection.2These lower level models suggest cor-

ruption can be cleaned up within organizations by altering the incentive structures that

agents face. There are examples in the literature of successful anticorruption efforts

targeting individual organizations, for example in Klitgaard (1988).

There is a disjuncture in the insights that these approaches provide. The latter sug-

gests that it is feasible to clean up organizations with targeted policies. The former ap-

proach, on the other hand, suggests that this should not be possible—only an economy-

wide effort will work. However, while they produce conflicting policy recommendations,

both approaches have empirical support.

In this paper, we propose a simple model of coordination on social norms (Rabin

1994; Fischer and Huddart 2008) to reconcile the two approaches. An agent in our

model chooses how much to exploit opportunities for corruption but incurs a cost in

doing so. The magnitude of this cost depends on his individual perception of the social

norm regarding “acceptable” corruption, which is an aggregation of the positions held

by his peers within the same organization as well as agents across the society. It is crucial

to our model that the agent’s perception is more heavily influenced by the stances of his

immediate peers than by those outside his organization. In equilibrium, each organiza-

tion coordinates on a local norm which we term its “organizational focus.” Different

organizations may coordinate on widely different foci even when agents are homoge-

neous, self-selection is absent, and there are no differences in incentives. This result is

consistent with the empirical observation that corruption levels between organizations

vary more than differences in incentives can explain (Schneider 2011).

We define the “social norm” as the employment-weighted average behavior across

all organizations. The individual agent’s perception of the social norm, however, is im-

perfect; it accords positive weight to the behavior of his organizational colleagues (the

local norm) as well as the true social norm. When his perception is limited only to the

local norm, the culture in each organization is independent of the rest of the econ-

omy. Similarly, when agents accurately perceive the social norm, all organizations in the

economy share a homogeneous culture. However, when agents are influenced by both

their local and the global norm, differences between organizations can be sustained in

equilibrium. We identify conditions under which the equilibrium distribution of orga-

nizational foci in an economy is nondegenerate.

1Evident in casual observation as well as increasing numbers of corruption measures such as Trans-

parency International’s indices.

2An important institutionalized selection mechanism that has been long known in the Indian context

is the sale of “lucrative” administrative positions based on the bribe income that an incumbent is able

to earn during the tenure of his posting. See Wade (1982, especially, pp. 302–307) for an early and

detailed study, and also Wade (1985).