Encyclopedia of Law and Economics

Living Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Administrative Corruption

  • Maria De Benedetto
Living reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7883-6_527-1

Abstract

The widespread interest at national and international level in combating administrative corruption is strictly connected with the idea that it produces many negative effects, distorts incentives and weakens institutions. On the other hand, administrative corruption has been also considered as an extra-legal institution which – under certain conditions – could even produce positive effects.

Anticorruption strategies have been developed with reference to a Principal-Agent-Client model or using an incentive-disincentive approach as well as an ethical perspective.

However, preventing corruption needs a tool-box: good quality regulation, also when regulation determines sanctions; controls, which should be sustainable and informed to deterrence and planning; administrative reforms, in order to reduce monopoly and discretionary powers, to strengthen the Civil Service and to ensure transparency and information.

Keywords

Administrative Reform Corrupt Transaction Corruption Control Definition Debate Foreign Public Official 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Definition

Abuse of public power for private gain.

Administrative Corruption: The Definition Debate

Defining administrative corruption is not a simple task. There is large agreement about the idea that corruption crosses legal systems, history, and cultures and that it is “as old as government itself” (Klitgaard 1988, p. 7) and a “persistent and practically ubiquitous aspect of political society” (Gardiner 1970, p. 93). At the same time, there is an agreement about the separate idea that corruption is a relative concept, that it should be understood only inside a specific cultural context, and that a behavior which is considered to be corrupt in one country (or at one time) could be considered not to be corrupt elsewhere (or at different times): in other words, “corruption is the name we apply to some reciprocities by some people in some context at some times” (Anechiarico and Jacobs 1996, p. 3).

Despite this difficulty, scholars have provided a number of definitions starting from various points of view.

A first approach has focused on the moral stance of corruption (Banfield 1958) and “tends to see corruption as evil” (Nye 1967, p. 417), requiring changes in “values and norms of honesty in public life,” because without “active moral reform campaigns, no big dent in the corrosive effects of corruption is likely to be achieved” (Bardhan 1997, p. 1335).

The second approach, however, has considered corruption also from an economic point of view, highlighting that under certain conditions, it might produce positive effects. As a consequence, corruption should be considered more objectively because it represents an “extra-legal institution used by individuals or groups to gain influence over the action of the bureaucracy” and, moreover, because “the existence of corruption per se indicates only that these groups participate in the decision-making process” (Leff 1964, p. 8).

Important contributions to the definition debate (Klitgaard 1988; Rose-Ackerman 1999; Ogus 2004) recognized that – in any case – “economics is a powerful tool for the analysis of corruption” (Rose-Ackerman 1999, p. xi).

Furthermore, corruption “involves questions of degree” (Klitgaard 1988, p. 7): in this light, “petty” administrative corruption has been distinguished from political (or “grand”) corruption which “occurs at the highest level of government and involves major government projects and programs” (Rose-Ackerman 1999, p. 27). There is also systemic corruption when it is “brought about, encouraged, or promoted by the system itself. It occurs where bribery on a large scale is routine” (Nicholls et al. 2006, p. 4).

One of the most important definitions of corruption is “behavior which deviates from the formal duties of a public role because of private-regarding (personal, close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence” (Nye 1967, p. 419).

However, the most used definition has been provided by transnational actors, such as the World Bank, which refers to a concept of corruption vague enough to be used in every national context and to include all kinds of corruption: “the abuse of public power for private benefit” (World Bank, Writing an effective anticorruption law, October 2001, Washington, 1; World Bank. Helping countries combat corruption: progress at the World Bank since 1997, Washington, 2000).

Corruption reveals a rent-seeking activity (Lambsdorff 2002), an effort to achieve an extra income (J. Van Klaveren, The Concept of Corruption, in Heidenheimer et al. 1993, 25) by circumventing (as in the case of creative compliance, R. Baldwin et al., Understanding Regulation: Theory, Strategy and Practice, Oxford University Press, 2012, 232) or directly by breaking the law.

Effects of Administrative Corruption on Administrative Performance

Economic effects of administrative corruption are controversial, so are the effects of corruption on administrative performance (D.J. Gould and J.A. Amaro-Reyes, The Effects of Corruption on Administrative Performance. Illustrations from Developing Countries, World Bank Staff Working Papers, number 580, Management and Development Series, number 7, 1983; see also Nye 1967).

On one side, there is a point of view which tends to overestimate the positive effects of corruption. Many aspects have been mentioned in this regard: positive effects have been recognized especially when corruption is “functional” to the agency’s mission (Gardiner 1986, p. 35) or when it secures, in some cases, economic development (Leff 1964) or when it corrects “bad” (inefficient) regulation (Ogus 2004, pp. 330–331). In other words, corruption “may introduce an element of competition into what is otherwise a comfortably monopolistic industry” (Leff 1964, p. 10).

On the other side, there is a different point of view which recognizes that corruption “can determine who obtains the benefits and bears the costs of government action” (Rose-Ackerman 1999, p. 9) and, in so doing, that “distorts incentives, undermines institutions, and redistributes wealth and power to the undeserving. When corruption undermines property rights, the rule of law, and incentives to invest, economic and political development are crippled” (Klitgaard 2000, p. 2).

However, even though some economic and bureaucratic benefits of corruption have been recognized, “in the large majority of cases intuition suggests that there will be significantly outweighed by the costs” (Ogus 2004, p. 333).

In particular, corruption has a “destructive effect […] on the fabric of society […] where agents and public officers break the confidence entrusted to them” (Nicholls et al. 2006, p. 1; see also O.E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, in “Journal of Law and Economics”, Vol. 22, No. 2, 1979, 242: “Governance structures which attenuate opportunism and otherwise infuse confidence are evidently needed”).

Furthermore, corruption has been regarded as a “sister activity” of taxation, but it has been considered to be more costly: in fact, it presupposes secrecy which “makes bribes more distortionary than taxes” (Shleifer and Vishny 1993, p. 600) and which represents the greatest threat to the integrity of public officials.

Combating Corruption: Why?

High levels of corruption have been econometrically associated with lower levels of investments as a share of Gross Domestic Product (GDP) (Mauro 1995) even if “the connection between corruption and the lack of growth is more often assumed than demonstrated” (Ogus 2004, p. 229). This is one of the reasons which justifies the increasing national interest in combating corruption.

There is, also, a wider interest in anticorruption policies characterized by an international effort which presents important practical consequences, e.g., the case for the anticorruption prerequisites in World Bank loans to developing countries (Guidelines on “Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, 2006-revised 2011) which require the putting in place of regulatory and institutional mechanisms to fight corruption (Ogus 2004, p. 329). Anticorruption policies are, in such cases, a sort of condition for obtaining a loan.

In order to clarify some aspects relevant to combating corruption, it would be important to make note of the lack of data in this area (Gardiner 1986, p. 40) as well as of the difficulty in measuring it (Anechiarico and Jacobs 1996, p. 14). Furthermore, it is also important to remember that a large part of the institutional debate is focused on corruption perception rather than on corruption reality and (finally) that the only sustainable institutional goal is reducing corruption because corruption is considered impossible to eradicate (Ogus 2004, p. 342): “anti-corruption policy should never aim to achieve complete rectitude” (Rose-Ackerman 1999, p. 68).

As a consequence, “the optimal level of corruption is not zero” (Klitgaard 1988, p. 24). Anticorruption controls, in fact, are expensive (Anechiarico and Jacobs 1996), so it could be necessary to decide the extent to which we should combat corruption: the point of intersection of the curves – which describe the quantity of corruption and the marginal social cost of reducing corruption – identifies “the optimal amount of corruption” (Klitgaard 1988, p. 27). In other words, when we say “why combat corruption?”, in some way we simply mean “why keep corruption under control?”

Looking closely at the question, one of the most important reasons for which corruption should be controlled (a reason characterized at the same time by a moral and an economic stance) is that corruption represents a “form of coercion, namely economic coercion” (C.J. Friedrich, Corruption Concepts in Historical Perspective, in Heidenheimer et al. 1993, 16) which produces a fundamental distortion in the economic process, artificially separating economic activity and its result into two abstract concepts (M. De Benedetto, Ni ange, ni bête. Qualche appunto sui rapporti tra morale, economia e diritto in una prospettiva giuspubblicistica, in “Nuove autonomie”, no. 3, 2010, 657, quoting the Italian legal philosopher Giuseppe Capograssi). The result benefits someone else even though it belongs to others (see A.G. Anderson, Conflicts of Interest: Efficiency, Fairness and Corporate Structure, in “UCLA Law Review”, vol. 25, 1978, 794). In so doing, corruption changes the value (i.e., the result of the economic activity, at the same time moral and economic value) into mere advantage and the economic process in itself is corrupted.

Preventing Corruption: How?

Anticorruption could be considered as a “comprehensive strategy” which should be built with a number of tools (Rose-Ackerman 1999, p. 6; J.A. Gardiner and T.R. Lyman, The Logic of Corruption Control, in Heidenheimer et al. 1993, 827).

The first point in preventing corruption is to recognize that there are different kinds of transaction which directly produce (or indirectly stimulate) corrupt behavior and that these should be considered as separate battlefields which need specific tools.

In this regard, some contributions have used the “Principal-Agent-(Client)” model (Banfield 1975; Rose-Ackerman 1978; Klitgaard 1988; Della Porta and Vannucci 2012). In ordinary cases of corruption, there is a bribe giver and a bribe taker, but corrupt transactions involve three actors: the Principal (the State and its citizens, always considered the victims), the Agent (the civil servant in charge of administrative tasks), and the Client (the enterprise or the citizen, e.g., as tax payer).

Corrupt transactions in strict sense can be performed in the Agent-Client relationship (e.g., bribery, extortion). The Principal-Agent relationship as well as the Principal-Client relationship could present behavior oriented toward illicit rent seeking (e.g., in the first case, internal fraud and theft of government properties; in the second case, tax frauds or illegal capital transfers), very often facilitated by widespread conflicts of interest (Auby et al. 2014), but “this is not considered to be corruption since it does not include the active (or passive) collusion of an agent of the state” (Robinson 2004, p. 110).

The institutional response to prevent direct or indirect corruption in these different kinds of transaction involves a tool-kit: internal or external controls over administrative action (P/A), inspections on private economic activities (P/C), and criminal investigations into specific cases of corruption (A/C).

The second point in order to prevent corruption regards the opportunity to adopt an incentive/disincentive approach, changing the system of rewards and penalties (Klitgaard 1988, p. 77; Gardiner 1986, p. 42) in a mix of “carrots and sticks” (Rose-Ackerman 1999, p. 78). There is large agreement about the opinion that “corrupt incentives exist because state officials have the power to allocate scarce benefits and impose onerous costs” (Rose-Ackerman 1999, p. 39). Reducing incentives to corruption and increasing its costs could involve structural reform (see infra 4.3) as “the first line of attack in an anticorruption campaign” (Rose-Ackerman 1999, p. 68).

The third point implies a problematic analysis of the large recourse – in institutions as well as in business, at national level as well at the international one – to ethical codes and other similar tools in order to ensure ethical responses to corruption and to strengthen anticorruption policies by stimulating individual morality. However, this tendency to regulate ethics is more effective in some cultural contexts than in others but could produce side effects. Ethics is typically free, while law is characterized by coercion (and by sanctions). If we use legal provisions (or any kinds of sanction) to induce ethical behavior, we are transforming a free behavior into a legal obligation, reducing the moral involvement of the individual, even if the legal provision is established by soft laws (such as ethical codes): this is a real paradox in regulating ethics (M. De Benedetto, Ni ange, ni bête cit., 656; see also Anechiarico and Jacobs, 1996, p. 202). In other words, tools should be consistent with the objective: law can establish incentives for moral behavior but cannot either impose or produce a moral (free) behavior by coercive means.

Regulation

As we have seen, the problem of corruption has in part a moral and a social stance, so a first step in preventing corruption would be for regulation to accept its own limits and to recognize that not only legal but also extralegal norms operate (on this point see R. Cooter, Expressive Law and Economics, in “The Journal of Legal Studies”, vol. XXVII, June 1998, 585).

Furthermore, anticorruption policies have better chances of success if legal provisions and public opinion converge. The problem is particularly relevant in cases of “gray” corruption (A.J. Heidenheimer, Perspectives on the Perception of Corruption, in Heidenheimer et al. 1993, 161) in which there is a mismatch between what is considered corruption by public opinion and what is corruption by law. So, if regulation wants to achieve anticorruption objectives, it should take into account the social and moral context in which it will be applied and – in this way – it will strengthen enforcement and increase compliance: “the majority of government employees are honest, not because of rules, monitoring or threats but because of value and personal morality” (Anechiarico and Jacobs 1996, p. 202).

Moreover, it has long been clear that the functioning of market economy needs “a firm moral, political and institutional framework,” which implies “a minimum standard of business ethics”. The market economy, indeed, is not capable of increasing the “moral stock” by itself because “competition reduces the moral stamina and therefore requires moral reserves outside the market economy” (W. Röpke, The Social Crisis of our Time, Transaction Publishers, 1952, 52). This seems to be even more true when the individual choice on ethical rules takes place inside large groups (J.M. Buchanan, Ethical Rules, Expected Values, and Large Numbers, in “Ethics”, vol. 76, 1965, 1).

Secondly, far from being a solution, regulation is recognized as a direct factor that promotes corruption (Tanzi 1998, p. 566). Overregulation could increase bureaucratic power and multiply the opportunities for creative compliance, nurturing a corruptible social environment and allowing more and more corruption: “the possibility of its transgression or perversion is always already inscribed into the law as hidden possibility. This, then, is the secret of law” (Nuijten and Anders 2007, p. 12).

Thirdly, since regulatory processes are fragile, special attention should be paid to sensible steps in the procedures: consultations, for example, could “increase the opportunity for corrupt transactions” (Ogus 2004, p. 341).

Starting from these premises, the problem seems to be not anticorruption regulation but good regulation in itself, regulation capable of making rules effective, of ensuring enforcement, and of increasing compliance (in general on this point, Becker and Stigler 1974). Regarding the content of such good regulation, anticorruption objectives could be achieved thanks to reducing monopoly and discretion (Rose-Ackerman 1999) as we will see later (par. 4.3).

Another important regulatory matter in preventing corruption concerns sanctions (Klitgaard 1988, p. 78). They should be well calibrated because they respond to an intrinsically economic logic – indispensible to making laws effective – and because they can even influence the amount of the bribe: “penalizing the official for corruption changes the level of the bribe he demands, but does not change the essence of the problem” (Shleifer and Vishny 1993, p. 603; Ogus 2004, p. 336; see also Svensson 2003). On the other hand, it should be clear that “in the presence of corruption, it is optimal to impose (or at least threaten to impose) nonmonetary sanctions more often” (Garoupa and Klerman 2004, p. 220) as well as to reward enforcement (Becker and Stigler 1974, p. 13) and compliant groups (Gardiner and Lyman, The Logic of Corruption Control cit., in Heidenheimer et al. 1993, 837; Ogus 2004, p. 337): this idea is not new and was, in a similar form, already proposed in 1766 by Giacinto Dragonetti in his “Treatise on Virtues and Awards” (first English translation 1769).

Controls

In order to prevent corruption, controls are needed because human behavior is fallible and corruptible, because human behavior changes when subject to controls, and because corruption lives in the dark and controls may constitute the most important tool in rebalancing the asymmetric information between corrupt people and institutions (in this regard, compensating whistle-blowers has been considered critically by Anechiarico and Jacobs 1996, p. 199 and Ogus 2004, p. 338). Among the different kinds of controls, inspections constitute the strongest tool, because they are characterized by coercive power.

On the other hand, traditional corruption controls have been considered inadequate and even “outdated and counterproductive” (Anechiarico and Jacobs 1996, p. 193).

Furthermore, it should be taken into account that controls (e.g., inspections) have a hybrid nature: not only are they a way to combat or prevent corruption but also they are real occasions for corrupt transactions because they represent a concrete contact between the Agent and the Client, particularly sensitive and dangerous when the Client has an interest to maintain (in any case and at any condition) the extra income which comes from illicit activities or when the Agent (who want to achieve an illicit extra income) has the opportunity to extort the Client.

The system of controls should be, indeed, sustainable from an administrative point of view, also in the field of anticorruption. In particular, it would be important to reduce the number of controls, because they represent a cost (not only for public administration but also for enterprises and citizens; see in this regard the Hampton Report, H.M. Treasury, Reducing administrative burdens: effective inspection and enforcement, March 2005) and because they are (as we have seen) occasions for corruption.

At the same time, it is important to increase their effectiveness in preventing corruption cases: for this purpose, anticorruption controls as a system should be informed by deterrence. The most relevant general contribution on this topic (Becker 1968) suggests that the individual decision about compliance is a result of an economic reasoning which connects the cost of compliance, the size of the penalty, and the risk of incurring the penalty. This reasoning, on the same grounds, contributes to establishing the eventual size of the bribe (Ogus 2004, p. 336). Furthermore, planning controls in anticorruption policies should be guided by a risk-based approach (in general, R. Baldwin et al., Understanding Regulation cit., 281), capable of mapping the most dangerous areas of administrative activity (in terms of probability of corruption) and capable of focusing – between the possible objects of control – on cases in which it is more probable to find evidence of corruption.

Administrative Reforms

There is a sort of conflict – observed by some scholars – between anticorruption policies and administrative reform. When anticorruption prevails, administrative reforms seem to be reduced in importance or to become marginal: “the logic of antibureaucratic reform leads to a model of public administration that ignores corruption, while the logic of anticorruption reform ignores public administration” (Anechiarico and Jacobs 1996, p. 204). It could even be possible that governments’ anticorruption effort produce further costs “[…] not only in terms of the funds spent to control corruption, but in the deflection of attention and organizational competence away from other important matters” (Klitgaard 1988, p. 27).

At the same time, it could be useful to approach the problem of administrative reforms (in the perspective of anticorruption) in a practical manner, because “in terms of economic growth the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy” (Huntington 1968).

The first idea, in this regard, is to reduce the public sector: “the only way to reduce corruption permanently is to drastically cut back government’s role in the economy” (Becker 1997).

The second relevant aspect is to reduce monopoly and discretionary powers (Ogus 2004, p. 331): “insofar as government officials have discretion over the provision of these goods [licenses, permits, passports and visas], they can collect bribes from private agents” (Shleifer and Vishny 1993, p. 599).

The third aspect regards the civil service (Rose-Ackerman 1999, p. 69) also because there are bureaucracies which seem to be less corruptible than others (S. Rose-Ackerman, Which Bureaucracies are Less Corruptible?, in Heidenheimer et al. 1993, 803). The question should be analyzed both from the point of view of civil service independence (Anechiarico and Jacobs 1996, p. 203) and from the point of view of civil service incentive payments (“often cited as one of the most effective ways of fighting corruption”, Bardhan 1997, p. 1339).

The fourth aspect involves procedural and organizational design (Ogus 2004, p. 338) as well as administrative cooperation, crucial in order to enforce regulation and to effectively prevent corruption cases: in fact, “internal organisation of institutions influences their members’ propensity to corruption” (Carbonara 2000, p. 2). Among other aspects, increasing international cooperation in combating corruption is indispensible: this is clear at the EU level, where it was recently affirmed that “anti-corruption rules are not always vigorously enforced, systemic problems are not tackled effectively enough, and the relevant institutions do not always have sufficient capacity to enforce the rules” (EU Anti-corruption Report, COM 2014, 38 final, 2). Furthermore, this is confirmed at further levels, as in the case of GRECO, Group of States against Corruption, established in order “to improve the capacity of its members to fight corruption” (Statute of the GRECO, Appendix to Resolution (99) 5, art. 1) or as in the case of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Overall, indeed, there is a general problem of transparency and information. Transparency reduces the opportunities for corruption “through procedures which make the process and content of decision-making more visible” (Gardiner and Lyman, The Logic of Corruption Control cit., in Heidenheimer et al. 1993, 830). In the same way, information on what the Agent and the Client are doing allows the principal “to deter corruption by raising the chances that corruption will be detected and punished” (Klitgaard 1988, p. 82).

However, every anticorruption project needs a fine-tuning (Anechiarico and Jacobs 1996, p. 198) which implies both a legal and an economic approach, but which should by now be open to the contributions of other disciplines (e.g., behavioral sciences). In any case, “scholars of law and economics” will continue developing studies in the area of corruption also “because it raises fascinating issues about the enforcement of law in the broadest sense” (Bowles 2000, p. 480).

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© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Political ScienceRoma Tre UniversityRomeItaly