V. Policy Issues - 2

While regulations designed primarily
to serve the patronage-dispensing
power of politicians and bureaucrats are
common, there are many regulations
which serve some other valued social
objectives, and there may be a tradeoff
between these objectives and that of reducing
corruption through deregulation.
Suppose a scarce but essential
consumer good (like food) in a poor
country is currently rationed by the government
so that the poor people can
have some access to it. The rations are
administered by corrupt officials. What
will be the welfare consequences for
the poor of replacing this system by the
market?12 To simplify, let us assume
that the government is the only source
of food under the rationing scheme,
that food obtained under ration cannot
be resold, and that corruption takes the
form of the official charging a price
higher than the stipulated ration price.
In Figure 2 the ration price p is given
by the slope of AB and the consumer’s
income by OA. The ration, x – , is binding
------------------------------------------------
11 The history of privatization in the last few
years in many developing countries is replete with
instances of corrupt transfers to cronies of politicians.
12 For a taxonomic analysis of different cases for this
question, see Peter J. Gordon (1994). The idea of Figure
2 is due to T. N. Srinivasan.

in the sense that the consumer with his
income OA and ration price p would
like to buy x which is more than x–. If
there were no corruption his rationed
consumption equilibrium will be at
some point G on the line AB to the left
of D. Suppose the alternative nonrationed
market equilibrium is given by
point E, where the market price line,
which is the slope of AC, is tangent to
indifference curve I’, and the consumption
is given by x’. As long as G is to the
right of F (where the indifference curve
through E intersects AB), the consumer
prefers the uncorrupt ration scheme to
the market system. Now suppose the
corrupt official charges a price higher
than the ration price while distributing
a stipulated total amount of food. The
broken curve in Figure 1 is the locus of
points of tangency on the indifference
map as the price line is rotated with A
as its focus starting at AB and converging
to the vertical axis. It is easy to see
that this locus is also the locus of consumption
points to which the consumer
is driven to by the corrupt official as the
ration is reduced from x– to zero, because
at each point on the locus the
slope of the indifference curve represents
the maximum price the consumer
is willing to pay for the associated ration.
As long as the ration exceeds x’,
the consumer will prefer the corrupt ration
scheme to the market system. The
basic point is simple, although it can be
made with more complicated models,
and should be brought to the attention
of those who in their zeal for deregulation
and the market system with a view
to reducing corruption lose sight of
the social objective that the regulation
was supposed to serve. (It is not an
accident that getting rid of the corrupt
public distribution systems in food
under structural adjustment programs
in developing countries has been
politically so unpopular.) In general
the literature on corruption often
overlooks the distributional implications
of corruption (apart from noting
that the poor do not have the resources

or the “connections” to be able to bribe
their way through).13