Expert Commentary

Bribes, lobbying and development

2011 study in the American Political Science Review on how cycles of bribery can trap developing countries in corruption.

Bribery (iStock)

It is a commonplace that bribery seems rife in the developing world. In richer countries, however, legal lobbying is the preferred method of operation for those trying to overcome rules. As a country’s industry advances, the preferred mode of transaction might naturally switch to lobbying. So why does corruption seem more stubbornly persistent in the developing world, despite economic progress?

A 2011 paper from Northwestern University and Stockholm University published in the American Political Science Review, “Bribes, Lobbying and Development,” built mathematical models to analyze the choices made by firms with regard to lobbying and bribery within different contexts. The researchers sought to analyze how bribery may paradoxically undercut the very mechanisms that would foster more legitimate norms of behavior.

The paper’s findings include:

  • Smaller firms are more likely to offer bribes. However, the more capital a firm acquires, the higher the bribes then become, and growth-promoting investment becomes disincentivized within the firm. This is termed a “holdup problem,” because at the time of an initial bribe, the bureaucrat cannot commit to never asking for higher bribes once the firm is larger.
  • If firms demonstrate a willingness to bribe, or the bureaucrat accepting the bribes is very powerful, then the cost of bribes will often increase faster than the firm’s cost of complying with regulation would be. This should incentivize a shift to lobbying from the firm. Yet, “firms anticipate the holdup problem and larger bribes following their investments. This reduces the incentives to invest, perhaps preventing the industry to reach the capital level at which they would have switched to lobbying.”
  • If the government cares too little about firm compliance and lowers the price of non-compliance for firms, then firms will continue bribing beyond the point where their growth should have necessitated a switch to lobbying. This is referred to as a “poverty trap.”
  • Another paradox persists with respect to anti-corruption rules in the developing world: “tough penalties on corruption make firms more likely to lobby instead of bribe — conditional on the stage of development — but they also increase the level of bribes. This reduces the incentives to invest, making a poverty trap more likely.”

The researchers conclude that “from a normative point of view, our model suggests that the penalty for corruption should be lower in poor countries. Furthermore, it suggests that policies aimed at boosting productivity … may be a better approach to reducing corruption because they make a switch from bribery to lobbying more likely and at an earlier point in time through its effect on capital accumulation.”

Tags: crime, economy, ethics, corruption