Thursday, December 6, 2012

Gift giving to influence decision making

Ulrike Malmendier and Klaus Schmidt have a very appropriate working paper on the corrosive effects of official gift transactions. They outline the problem,
In a typical scenario, a procurement manager receives gifts (ranging from small “tokens of appreciation” such as pens or coffee mugs to precious bottles of wine or event tickets) from a supplier, who hopes to get favorable treatment relative to his competitors, even if his competitors offer better or cheaper products. Similarly, politicians and regulators receive gifts or campaign contributions from lobbyists trying to affect their decisions in favor of special interest groups. In both examples the recipient of the gift makes a decision on behalf of a “client” who is often anonymous: the shareholders of the procurement manager and the general public... a physician may prescribe more drugs of a pharmaceutical company after attending a conference sponsored by that company because he wants to get more sponsoring in the future or because of scientific information provided at the conference... Such practices have raised concerns – and stirred a regulatory debate – about the influence of gifts. Gift giving has been blamed as a major contributor to weak corporate governance, to the dramatic rise of health care costs, and to wasteful pork barrel politics.
And they find that even small gifts have outsized negative externalities,
In a series of experiments, we show that, even without incentive or informational effects, small gifts strongly influence the recipient’s behavior in favor of the gift giver, in particular when a third party bears the cost. Subjects are well aware that the gift is given to influence their behavior but reciprocate nevertheless. Withholding the gift triggers a strong negative response... We also show that disclosure and size limits are not effective in reducing the effect of gifts, consistent with our model... The main contribution of our paper is to show that there is an additional  and powerful effect of the gift per se. Subjects reciprocate to (small) gifts even if there are no monetary incentives for doing so and if the gift does not convey positive information about the product. The laboratory setting allows us to exclude future interaction, informational content, or any (other) monetary incentives as explanations for such a response. We show a significant effect even for small-scale gifts that amount to little compared to the income of the recipient. We also find that the effect is significantly stronger when it comes at the expense of a third party, compared to the classic gift exchange situation with two parties.
Their central finding is simple, "If a gift is given the decision maker tends to favor the gift giver; if no gift is given the decision maker tends to discriminate against him, both at the expense of the third party". The most pernicious effect of this practice comes in gifts given to public officials and health care professionals. The former comes at the cost of the public resources while the latter at the cost of the patients undergoing treatment. Such practices are widespread and not confined to just developing countries.

The close links between public officials and corporate interests is in no small measure underpinned by the psychological bonds established through gift-giving. As I have blogged earlier, human beings form rational expectations based on the social environment in which they work. Public officials, new to a particular office, internalize the expectation of being offered gifts either from the precedents of gift-giving established in that office or from observing their peer group elsewhere.

Furthermore, these expectations form a slippery slope that leads straight down the path to outright corruption. What starts off with accepting routine and small gifts, soon snowballs into accepting expensive gifts and demanding gratification in return for a favor. This process is furthered by the gift-giver who immediately capitalizes on the expectations formed within the official and fulfills his urges. A Mont Blanc pen soon gives way to a family holiday at an exotic foreign location or new year jewelry gifts for the family. With time, even this gives way to offers to finance the child's higher education at a foreign university or an apartment at a prime location. The noose tightens and the public official soon gets anchored within the cross-hairs of the corporate interest.

There are no easy solutions. Banning all gifts is not practical given the difficulty of its enforcement. Moral suasion and the creation of an environment that discourages, even stigmatizes, such gift taking is the only sustainable way to address it.

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