Monday, February 1, 2010

Why rent seeking is pervasive

Here is how the decision-tree for a public servant making a choice between remaining honest or becoming corrupt would look



Assume that the rent payout is Rs 100,000. Assume that the probability of a corrupt official getting caught is just 10% (a good approximation if we take the full career of officials even in the more corrupt departments). Assume also that only 25% of those accused of corruption actually end up being punished. And of those punished, it is not unreasonable to assume that just 10% get dismissed from service (in fact the actual number would be insignificantly small, or infinitesimal), while the rest escape with administrative penalties like cut in increments or reduction in ranks, all of which have the effect of reducing their salaries.

One of the important points to be borne in mind is that unlike other forms of theft and pilferage where it is easy to recover the booty, it is almost impossible to recover the rents collected by the officials. Therefore, whatever has been amassed is more likely to remain with the official. Further, except in cases where departmental materials have been diverted or government funds have been mis-appropriated, the major share of corruption cases involve taking bribes or personal favors for doing official functions. It is not practical nor possible to reverse such favors even if the employee is punished. In other words, the punishment only imposes an administrative penalty.

Let us make the following assumptions. We can assume a rent payoff of Rs 100,000. Assume that the financial implication of the reduction in salary is small enough to be irrelevant over the career of the official (a typical one or two increment cut in salary, with cumulative effect, has only marginal impact). Assume that the bribe required to get himself out is half the rent gained, or Rs 50,000. Assume that the environment has become so permissive that the peer-group stigma of being corrupt is minimal. Assume also that the salary foregone if dismissed is ten times (and at higher levels of the officialdom, the reverse is the case!) the rent gained, ie Rs 1000,000.

In the circumstances, the pay-off for each category would look like this
1. The expected value of a honest public servant is his salary
2. The expected value of a corrupt official, P(corrupt)
=
P(not getting caught)x(Salary+rent)+
P(caught)xP(bribe and escape)x(salary+rent-bribe) +
P(caught)xP(punished)xP(dismissed)x(rent+shame+salary foregone) +
P(caught)xP(punished)xP(penalized)x(lower salary+rent+shame)
= (approx)
Salary + 0.9x100,000 + 0.1x0.75x(100,000-50,000) + 0.1x0.25x0.1x(100,000-1000,000) + 0.1x0.25x0.90x100,000 = Salary + 90000+3750-2250+2250 = Salary + Rs 93750

As can be seen, the expected pay-off from taking a bribe of Rs 100,000 lakhs is salary + Rs 93,750. Now you decide whether to be corrupt or not!

1 comment:

Anonymous said...

I think that you're on the right track, but there are a few details that need some more work.

Public servants are motivated by 1) pay rises; 2) promotions; and 3) increased pensions (ie, based on final salary). Each one of these items is a "rent" in the true sense, because they are over and above the appropriate remuneration for the work (currently) done by the public servant.

In some countries, there is little in the way of outright corruption (ie, in the form of taking bribes, etc). However, there is tremendous inefficiencies caused through policies advocated by public servants, largely for the sake of allowing them the opportunity to seek the abovementioned rents.

In some ways, therefore, this kind of rent-seeking behaviour is as trecherous as outright corruption.

For instance, compare (1) a public servant who advises on an expensive new programme of dubious benefit which happens to provide her/him with such "rents"; and (2) a policeman who accepts a "gift" to ignore a minor traffic offence. What's the difference?