The Welfare Effects of Consumers' Reports of Bribery

• Date: 01 April 2016
• Published date: 01 April 2016
• DOI: http://doi.org/10.1111/jems.12149
• Author: J. Atsu Amegashie

The Welfare Effects of Consumers’ Reports

of Bribery

J. ATSU AMEGASHIE

Department of Economics and Finance

University of Guelph

Guelph, Ontario Canada N1G 2W1

jamegash@uoguelph.ca

A primary means of bureaucratic oversight is consumer complaints. Yet this important control

mechanism has received very little attention in the literature on corruption. I study a signaling

game of corruption in which uninformed consumers require a government service from informed

officials. A victim of corruption can report corrupt officials whose supervisors are negligent or

conscientious but an official’s type is his private information. I find that social welfare may be

nonmonotonic in the proportion of conscientious supervisors. Several examples show that an

increase in the proportion of conscientious supervisors decreases social welfare if the mass of

conscientious supervisors is below a critical level. I find that this perverse result does not hold if

(a) the bribe is very large, or (b) bribe-giving is legalized. I also find that there is an equilibrium

in which no one reports corruption.

1. Introduction

Government corruption is the sale by government officials of government property for

personal gain (e.g., Bardhan, 1997). In many less-developed countries, one must pay a

bribe to obtain a routine government service such as getting a child into a public school,

a driver’s license, a building permit, a passport, a birth certificate, clearing goods at

customs, etc. There is, of course, corruption in developed countries even if to a lesser

extent.

A primary means of bureaucratic oversight is consumers’ complaints. Ghana’s 2006

Whistleblower Act, the Punjab Citizen Feedback Model, and “I paid a bribe” websites1in

several countries recognize this point. In 2011, the Kingdom of Bhutan’s Anti-Corruption

Commission created an online form to allow the anonymous reporting of corruption.2

And in October 2013, Kenya launched an anticorruption web site3for people to report

incidents of corruption directly to the government. Users can upload videos, photos and

other documents and can choose from a long dropdown list of government departments

I thank a coeditor, two anonymous referees,and Henry Thille for very helpful comments. My thanks are also

due to Kurt Annen, Zubair Bhatti, Ken Jackson, Oliver Masakure, and Jun Zhang for helpful comments on

an earlier version of this paper. I also thank seminar participants at the following universities: Florida State,

Guelph, and Manitoba.

1. See a March 2012 New York Times article titled “Web Sites Shine Light on Petty Bribery Worldwide”:

http://www.nytimes.com/2012/03/07/business/web-sites-shine-light-on-petty-bribery-worldwide.html?

pagewanted=all&_r=0

2. Among others, the site states that “[H]elp us be more efficient and effective by providing true com-

plaints with specific details. Youcould also stand as witness and informer. Your identity and liability shall be

protected as per the witness protection sections under chapter 7 of the Anti-Corruption Act of Bhutan 2011.”:

http://www.anti-corruption.org.bt/?q=node/295

3. http://www.president.go.ke/en/category/corruption.php

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 2, Summer 2016, 516–534

Consumers’ Reports of Bribery 517

to complain about. The Punjab Citizen Feedback Model (Pakistan) involves an audit (phone

calls) to ascertain consumer feedback about a government service, and whether or not

they were made to pay a bribe for the service.4Recently, Basu (2012) proposed that

bribe-giving—but not bribing taking—should be legalized to encourage bribe-givers to

report corruption.

Surprisingly,this consumer-feedback mechanism has received very little attention

in the literature on corruption. The literature on whistleblowers focuses on employees

(not consumers) of an organization. In this paper, I study a model in which consumers

of a government service encounter corrupt officials whose superiors may be negligent

or conscientious. Whether a corrupt official’s supervisor is conscientious or negligent is

known to the official but not to the consumer. If a consumer rejectsa demand for a bribe

and reports corruption, he gets the service without paying a bribe if the supervisor is

conscientious. This is the benefit of reporting corruption. If the supervisor is negligent,

nothing is done about the consumer’s complaint and he does not get the service. So he

loses a positive surplus if the bribe he refused to pay was smaller than his valuation.

This is the cost of reporting corruption.

I find that in some cases, social welfare is nonmonotonic in the proportion of consci-

entious supervisors. In particular,it may be decreasing in the proportion of conscientious

supervisors. The intuition is that although increasing the proportion of conscientious

supervisors results in higher reports, it may also result in an increase in the number of

consumers who do not get the service because their complaints were handled by negli-

gent supervisors. It is an elasticity issue in the sense that for social welfare to increase,

consumers’ reports should not be too elastic with respect to an increase in the number of

conscientious supervisors. In some cases, an increase in the proportion of conscientious

supervisors decreases social welfare if the mass of conscientious supervisors is below a

critical level. This suggests that piecemeal anticorruption measures may be counterpro-

ductive or welfare reducing. I find this result does not hold if the bribe is very large or

if bribe-giving is legalized. I find that there is an equilibrium in which no one reports

corruption. This is because the equilibrium bribe is sufficiently small to make complaints

not worthwhile.

To the best of my knowledge, this is the first model of corruption in which

consumersdecision to report corruption is endogenized and studies the factors that

affect the frequency of consumersreports and their effect on social welfare. However,

there are some related papers. Mookherjee and Png (1992) study a model with con-

sumers’ complaints but these complaints are exogenous and there is no bribery. In

Prendergast (2003), the supervisors of corrupt officials are not negligent. Botero et al.

(2013), using survey data on reporting crime and corruption, found that better-educated

citizens are more likely to report crime and corruption, and argue that this may explain

why better-educated countries have better governments. Empirically, they also found

that the country-average assessment that a policeman violating the law will be punished

is a strong predictor of the probability of complaining about misconduct and reporting

4. The model is described at the official web site of the Government of Punjab as follows: “When a citizen

goes to a government office to avail a service (e.g., driving license, character certificate, property registration)

the office records his or her mobile number along with the transaction details. This data is passed on to local

officers and to a call center through an online data entry form or through SMS. The local officers call some of

the citizens. The call center sends SMS messages to citizens and also calls a much greater percentage to inquire

about quality of service received. Thus, the state, instead of passively waiting for the citizen to file a complaint,

if there is indeed cause of such a grievance, proactively engages the citizen and gets his feedback to improve

service delivery and, especially,weed out corrupt government officials.": http://www.punjabmodel.gov.pk/