Been sometime before I blogged about one of my favorite topics - the dynamics of corruption! Here is an attempt to answer the most persistently frustrating of socio-economic problems - why do people pay bribes and how can we restrain such payments?
The story goes like this. Buyers of the myriad government services, like those of any other product in a market, face similar demand-supply curves. As evident from the figure, those buyers above A in the demand curve (numbering Q1) are willing to pay more than the price fixed for the service/product, P1. This willingness to pay at the margins opens up opportunities which middle-men and bribe-takers exploit.
Citizens (buyers) lying on the upper-side of the demand curve are willing to pay more than the government prescribed user fee of P1. Therefore the area of triangle ABP1 (shaded) constitutes the full rent market.
Here is an attempt to apply the principles of economics to address the problem of bribe payments. While these suggested solutions will not in anyway eliminate rent-seeking, they will align incentives for all stakeholders in a manner so as to certainly reduce the likelihood of rent-seeking behavior. The first approach addresses the demand-side (rent-givers) and the second manages the supply-side (rent-seekers).
One, Econ 101 teaches us that markets do a good job of price discovery and too low a price causes incentive distortions. For various reasons, the prices fixed by governments are most often too small, leaving rent-seekers with ample opportunity to exploit (as indicated in the graphic above). For example, electricity connection charges are very low and government machinery is invariably over-stretched. Buyers (with a much higher willingness to pay) are therefore incentivized to pay a rent-premium to access the connection faster and without any inconvenience.
The solution is to have a differential pricing mechanism (a two-price arrangement), with a higher priced premium service delivery channel that would seek to capture higher willingness to pay consumers. They would pay double or triple the amount (to be fixed based on the demand for the service and the ability of the system to deliver the premium service) to have the same service delivered at their door-step and within 24 hours. This hassle-free window would cater to those citizens with higher willingness to pay. It reduces the possibility of rent-seeking by institutionally capturing the higher amounts that people are willing to pay. See this and this.
Two, Econ 101 also tells us that markets provide competition which arbitrages away certain types of inefficiencies. So if one supplier provides widgets at $5, whereas the others are willing to sell it for $3, the former will be priced out of the market. Since government is the monopoly supplier of these products, direct external competition is impossible. The solution is therefore to have multiple channels (within government itself and also outsourced alternatives) to deliver the service so as to generate some level of competition.
Multiple channels within the same department - either at different locations or at different levels - provides citizens with a choice. The dynamics of this choice is often adequate to arbitrage away rent-seeking opportunities. Outsourcing (see this example) also helps avoid the critical citizen-government interface which is most often the origin of corrupt practices.
If the sale of all government services/products are subjected to this twin test, it would considerably lower the likelihood of rent-seeking behaviour - both eliminating it in some places or atleast minimizing the amounts extracted.