Rational Expectations and corruption

There are numerous supply-side explanations of corruption, but very little analysis of the demand-side dynamics. However, it is widely acknowledged that our social ills get reflected in the decision making processes and service delivery channels of the Government.

We can take the example of a service delivered by a Municipal Corporation, say application for building licence. There is a general schedule of time frame for approvals of different categories of building applications. For simplicity, let us assume that a newly recruited clerk and Building Inspector (BI) are posted for dealing with such applications, and also that the applications can be approved by the BI.

Let also assume that the first and the second applicants comes and pays only the fixed application fees, and duly get their applications approved. Now comes the third applicant, who is conversant with Government delivery channels and the potential for obstacles and also in a need to get the application approved at the earliest. He offers a small speed money of Rs 1000 to expedite the approval. The newly recruited clerk and BI, if not already aware, have a first hand experience of their remuneration value. Then comes another applicant, with much greater willingness to pay, who pays Rs 5000 to get the approval done.

Now, assume the fifth applicant, a more naive and principled citizen, comes and pays just the schedule fees, thereby evoking the first signs of indignation and rensentment in the new staff. After making him run around a few times through multiple visits, the plan is cleared. Then comes another applicant without the willingness to fray the rent. By this time, our new recruits are more hardened and have resolved not to clear the plan without extracting atleast some rent. The process goes on. Over a period of time, an equilibrium is reached and a standard rental rate becomes formalized for each category of building application approval. The aforementioned story is a real chronology of events, albeit simplified, which came to light in the Town Planning section of the VMC.

Economists talk of the Theory of Adaptive Expectations, which claims that agents' expectations of the future value of an economic variable are based on past values. In repsonse to its flaws, Robert Lucas Jr developed the Theory of Rational Expectations, which postulates that agents take into account the full information available and form expectations of a future event or the future value of an economic varaible.

Taking cue from these theories, one can safely presume that both the applicants and the staff form adaptive or rational expectations about the processes and transactions in applying for a building licence approval and also the rental value of these transactions. Any over-indulgent behaviour by an applicant quickly sets in motion a chain of adaptive expectations that creates problems for the subsequent applicants. The applicants also form expectations about the inevitability of such speed payments and the rate for such transactions. The demand side dynamics therefore contributes substantially to the creation and the sustenance of the corruption economy.