IV. Factors Behind Differential - 3

In Figure 1 there are three equilibrium
points, A, B, and C. A and C are
stable, but B is not. At point A all are
honest and it does not pay to be corrupt.
At C all are corrupt, and it does
not pay to be honest. At B, any given
official is indifferent (between being
corrupt and honest) but if only one
more official is corrupt it pays to become
corrupt; on the other hand, if one
fewer is corrupt, the marginal official
will choose to be honest. So initial conditions
are important: if the economy
starts with (or gets jolted into) a high
average level of corruption it will move
toward the high-corruption stable equilibrium
C; if the initial average corruption
is low, the economy gravitates toward
the honest equilibrium A. The diagram
illustrates in an elementary way
how two otherwise similar countries
(both in socio-economic structures and
in moral attitudes) may end up with two
very different equilibrium levels of corruption;
also, how small changes may
have a large impact on corruption if one
starts out at points close to B.
The problem with such simple diagrams
is that the mechanisms through
which the economy reaches one or the
other equilibrium are not fully spelled
out. There are now several theoretical
models in the literature which try to do
that rigorously, and also get away from
the naive informational presumptions
implicit in the diagram. We shall briefly
touch upon the main ideas in a few of
them. Olivier Cadot (1987) has a model
of corruption as a gamble, where every
time an official asks for a bribe in a bilateral
situation, there is a risk of being
reported to and sacked by a superior officer.
The optimal Nash strategy of a
corrupt official is derived under alternative
assumptions about the information
structure. The comparative-static results
show that a higher time discount
rate, a lower degree of risk-aversion,
and a lower wage rate will induce him,
under certain conditions, to be more
corrupt. Then Cadot goes on to introduce
corruption also at the level of the
superior officer who can be bribed (beyond
a certain threshold) to cover up
lower-level corruption. The interaction
of corruption at different hierarchical
levels of administration leads to multiple
equilibria (one with only petty corruption
and the other with more pervasive
corruption), as the probability of
being sacked diminishes with the general
level of corruption in the civil service,
and corruption at each level feeds
on the other. In the rent-seeking litera-

ture also it has been pointed out by
Arye L. Hillman and Eliakim Katz
(1987) that there are extra social costs
when there is a hierarchical structure
such that a lowly customs official is
obliged to pay a part of his take of
bribes to a superior. The usual presumption
of that literature—which is, as
we have seen, in any case questionable—
that bribes used in contesting a
rent do not entail a social cost because
they are only transfers, is seriously vitiated
when one takes into account multitiered
rent-seeking, with the official positions
to which the bribes accrue are
themselves contested with real resources.