Centralization of Bribery - 3

The idea of the differential efficiency
effects of centralized versus decentralized
corruption is akin to Olson’s (1993)
idea of smaller distortionary effects of
the tax impositions of the state as a “stationary
bandit” (having thus an “encompassing
interest” in the domain over
which its rent-exacting power is exercised)
as opposed to those of the “roving
bandit.” One may, however, point
out that even centralized corruption is
more distortionary than taxation (not to
speak of the extra burden of taxes that
public revenue losses from corruption

may necessitate). This is because of the
need to keep corruption secret, as
Shleifer and Vishny (1993) point out.
Efforts to avoid detection and punishment
cause corruption to be more distortionary
than taxation. Because different
activities have different chances of
detection for bribes, there will be some
substitution effect following from corruption
by which corrupt officials will
try to induce investment and transactions
in the direction of lower-detection
activities (or contractors who are less
likely to squeal, even though they may
be less efficient). Bureaucrats in poor
countries may, for example, opt for imports
of complex technology or goods
(where detecting improper valuation or
overinvoicing is more difficult) in preference
to more standardized, but possibly
more appropriate, technology or
goods. For similar reasons, allocating
government funds in a few large defense
contracts may look more attractive
to the officials involved than spending
the money in building numerous
small rural health clinics. To preserve
the secrecy of deals, a small elite group
may also try to raise entry barriers
for outsiders, which in many situations
has the effect of discouraging the flow
of new ideas and innovations. Secret
payments, particularly by foreign companies,
also tend to be accumulated
and spent not inside the country but
abroad.