Tullock and the welfare costs of corruption: there is a “political Coase Theorem”

Abstract

Gordon Tullock developed an approach to understanding dynamic processes of political change and policy outcomes. The key insight is the notion that political insiders have a comparative advantage—because they face lower transaction costs—in manipulating rules. The result is that political actors can collect revenues from threatening to restrict, or offering to loosen, access to valuable permissions, permits, or services. To the extent that the ability to pay for such favorable treatment is a consequence of private activities that produce greater social value, there is a “political Coase theorem”: corruption makes bad systems more efficient. But the dynamic consequences are extremely negative, because of the inability to institute reforms resulting from application of Tullock’s “transitional gains trap.”

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Notes

  1. 1.

    For a review of some of the literature on whether corruption “greases” or “sands” the wheels of development, see Méon and Sekkat (2005).

  2. 2.

    In a static sense, bribes are usually just cash transfers that carry minimal, if any, social welfare costs—except foregone productive opportunities. But the opportunity bribes afford either to break the law, or to set up mechanisms to facilitate the collection of bribes, can be very costly. Buchanan and Tullock (1972) recognized that the accumulation of successful bribes and collection of rents can result in the “dead hand of monopoly,” the costs of which are significant but hard to measure.

  3. 3.

    Examples include most of the OECD countries, though perhaps not Greece or Turkey at this point, and Asian market democracies such as South Korea, Taiwan, and Japan.

  4. 4.

    The characteristic way in which a social order structures human organizations also

    produces predictable features of the larger society. Limited access orders exhibit systematic rent-creation, market power, privileges, and differences between elites and others; they also preclude thriving markets and long-term economic development. Open access orders exhibit systematic competition, entry, and mobility; they also foster thriving markets and long-term economic development (North et al. 2009, p. 39; emphasis added).

  5. 5.

    Douglass North argued that it is the impersonal coordination of human activity that makes markets and prices valuable. See, for example, North and Thomas (1973) and North (1990) Of course, that claim echoes the long-held views of Mises (1952, 1998), Hayek (1945) and Kirzner (1963).

  6. 6.

    This was in fact the original argument made about rent-seeking as a kind of destructive competition that distorts price signals and locks in inefficiency. For a review, see Tollison (2012). Murphy et al. (2009) demonstrate the specific barriers that the particular form of rent-seeking we think of as “corruption” plays out, to devastating effect.

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Acknowledgements

Paper prepared for special issue of Public Choice “Commemorating The 50th Anniversary of Gordon Tullock’s ‘The Welfare Costs of Tariffs, Monopolies, and Theft.’” Credit for suggestions, but no blame for shortcomings, goes to William Keech, Matthew Mitchell, David Schmidtz and David Skarbek.

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Correspondence to Michael C. Munger.

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Munger, M.C. Tullock and the welfare costs of corruption: there is a “political Coase Theorem”. Public Choice 181, 83–100 (2019). https://doi.org/10.1007/s11127-018-0610-9

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Keywords

  • History of economic thought
  • Rent-seeking
  • Corruption
  • Economic development