ChapterPDF Available

The Organization of Anticorruption – Getting Incentives Right

Authors:

Abstract and Figures

Anti-corruption approaches can either relate to rules or to principles; they can be either top-down or bottom-up. This chapter seeks to reconcile top-down and bottom-up approaches and provides practical reform proposals. These include leniency, debarment, nullification, contract penalties and whilstleblowing.
Content may be subject to copyright.
389
Corruption poses similar problems to both governments and private
firms. Contracts are awarded to those paying bribes rather than delivering
quality. Public policies as well as corporate strategies are distorted by side
payments and resources are embezzled for private use. Due to these similar-
ities, most of the ideas developed herein are equally applicable to public and
private organizations.
Anti-corruption approaches can either relate to rules or to principles; they
can be either top-down or bottom-up. This chapter reviews a variety of widely
discussed approaches to anti-corruption and highlights some of the short-
comings of rules-based, top-down anti-corruption. The chapter makes the
argument that many in government and the private sector can contribute to
bottom-up endeavors. The chapter then emphasizes the need for bottom-up
methods to complement top-down approaches.The last section seeks to rec-
oncile top-down and bottom-up approaches and provides practical reform
proposals.
Rules-Based Anti-Corruption
Many anti-corruption methods refer to rules. These rules have two dimen-
sions. The first element is repression, which emphasizes draconian penalties
and a high probability of detecting malfeasance. Since the seminal work of
Becker, criminal behavior is seen as being driven by rational calculus. A fully
rational, risk-neutral actor opts for criminal behavior if the expected benefit
15
The Organization of Anti-Corruption:
Getting Incentives Right
johann graf lambsd orff
I am indebted to Mathias Nell, Robert Rotberg, and Emily Wood for helpful comments and
assistance.
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 389
Lambsdorff, Johann Graf (2009), "The Organization of Anti-
Corruption: Getting Incentives Right", in: Robert I. Rotberg
(ed.), Corruption, Global Security, and World Order, (The
Brookings Institution Press: Washington, D.C., 2009).
390 Johann Graf Lambsdorff
exceeds the sanction multiplied by the probability of being convicted. Even if
rationality is imperfect, this calculus captures many of the incentives faced by
human beings. This argument is further supported by the fact that bribery,
fraud, and embezzlement are less emotional, and more rational, forms of mis-
conduct. They require sophistication,skills, and long-term planning, empha-
sizing the sober balancing between pros and cons. The 2003 United Nations
Convention against Corruption requests that all signatory countries imple-
ment criminal codes that counter corruption. As of 2008, this approach is
the most important rules-based approach to deterring criminal behavior.
Repression is an indispensable element in the fight against corruption. But
judiciaries perform quite differently across countries. Data on prosecutions
and court convictions related to fraud, bribery, and embezzlement reveal that
such cases are common in countries such as Canada, Finland, Germany, and
New Zealand, reaching annually up to 100 cases per 100,000 inhabitants.
1
But
in many less developed countries these figures are drastically lower; often
fewer than one single case per 100,000 inhabitants is reported. What might
cause these huge discrepancies? First, law enforcement is costly and, second,
such convictions require an honest judiciary. But resources for developing an
honest judiciary may be in short supply, particularly in developing countries.
Apart from the costs, increasing repression also has detrimental effects.
Threats of penalties and enhanced monitoring may adversely affect the intrin-
sic motivation of public and private employees. Thus, employees may not
support the repressive actions of their superiors with their own efforts and
civic engagement. To the contrary, employees are induced to fight corruption
for their superiors but not for themselves. Empirical evidence exists that casts
doubt on approaches that focus on formal, rules-based, anti-corruption
endeavors. For example, Voigt, Feld, and van Aaken investigate the impact of
prosecutorial independence in containing corruption and find that de facto
independence decreases corruption.
2
However, de jure independence does
not exert the same impact. A similar finding related to strict campaign financ-
ing rules is reported by Stratmann.
3
Employing only formal rules may thus be
insufficient for containing corruption.
Global Integrity, a Washington based think-tank, assesses various key issues
of governance and anti-corruption. These data, as presented on its website,
reveal to what extent rules, in what Global Integrity calls the “legal frame-
work,” are effective in reducing corruption. It investigates issues such as elec-
tions, civil society and the media, accountability, administration, oversight,
and the rule of law. Table 15-1 reveals how the “legal framework” and its
“practical implementation” (another dataset assembled by Global Integrity)
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 390
affect perceived levels of corruption in a cross-country investigation.The data
on practical implementation positively correlate with Transparency Interna-
tional’s (TI) Corruption Perceptions Index. This correlation is revealed by a
coefficient of 0.098, which drops to 0.032 when controlling for GDP per
capita, but it remains significant. A similar result is not found for data on the
legal framework. A coefficient of –0.042 reveals that countries with a better
legal framework perform worse in the Corruption Perceptions Index.
In the 2007 Global Competitiveness Survey of the World Economic Forum
(WEF) businesspeople were asked about the effectiveness of anti-corruption
measures. Again Global Integrity’s data on practical implementation positively
Getting Anti-Corruption Incentives Right 391
Table 15-1. Ordinary Least Squares Regressions: Perceived Corruption,
Anti-corruption Rules, and Their Implementation
a
WEFPerceived
Effectiveness of
TI Corruption Anticorruption,
Dependent Variable Perceptions Index 2007
b
Independent Variable 1 2 3 4
Constant 1.8 2.34 4.72 5.27
(2.2) (3.2) (4.3) (4.7)
Anticorruption: Legal Framework
c
–0.042 –0.018 –0.033 –0.026
(–3.1) (–1.3) (–2.0) (–1.4)
Anticorruption: Practical 0.098 0.032 0.030 –0.001
Implementation
d
(5.7) (2.4) (2.6) (–0.1)
GDP per capita
e
0.12 0.056
(6.0) (3.6)
Observations 48 48 48 48
R
2
0.55 0.82 0.14 0.33
Jarque-Bera
f
15.4 1.5 0.9 1.9
a. White corrected t-statistics are in parenthesis.
b. In the World Economic Forum’s Executive Opinion Survey 2007 businesspeople were asked:
“In your country,has the government put in place effective measures to successfully combat cor-
ruption and bribery?” The data range between 2.0 (for Argentina) and 5.9 (for Canada).
c. Data from Global Integrity 2007. The data range between 51 (for Lebanon) and 96 (for
Romania).
d. Data from Global Integrity 2007. The data range between 30 (for Algeria) and 81 (for the U.S.).
e. Source of data: World Development Indicators. The data relate to 2005. It is purchasing power
adjusted in current international $1000.
f. The Jarque-Bera measures whether the residuals are normally distributed by considering its
skewness and kurtosis. The assumption of a normal distribution can be clearly rejected for levels
above six.
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 391
correlate with this WEF assessment. This correlation is revealed by a coeffi-
cient of 0.030 (this impact does not survive the inclusion of GDP per capita
as a control variable). As revealed by a coefficient of -0.033, a good legal frame-
work even decreases businesspeople’s rating of successful anti-corruption.
Rules-based approaches to anti-corruption are important, but such
approaches neither improve a country’s rating in the TI Corruption Percep-
tions Index nor do businesspeople perceive them to be effective. Such findings
certainly do not prove that rules-based approaches are futile but that these
approaches are sometimes badly communicated to the business community
or deemed insufficient by businesspeople. Certainly, these findings may also
imply that more time is needed for rules-based reform to see an impact on
perceived levels of corruption.
4
The second dimension of rules-based anti-corruption relates to limits on
discretion. Corruption takes place where office holders and corporate employ-
ees have leeway in carrying out their tasks. Suggestions to limit discretion relate
to rotation of staff, separation of functions, standardization of rules and pro-
cedures, internal and external audits, as well as the four-eyes principle, where
a second employee must verify and sign off on the decisions of his colleague.
But limits on discretion have their costs. Quite often, bureaucratic rules
aimed at reducing discretion tend to produce frictional costs and run counter
to the goals of a public administration. Kelman argues that anti-corruption
rules imposed by legislators aim at limiting the discretion of procurement
officers but instead produce unwanted outcomes.
5
Such rules aim at improv-
ing competition but divert officers from the actual goals of acquiring best-
value products and services for the government. For example, procurement
officers observe the performance of contractors over time. They gather expe-
rience with respect to the quality procured by contractors. But procurement
guidelines often discourage the use of this experience. Such guidelines result
because of fears that performance evaluations are biased or driven by bribes.
This top-down distrust toward procurement officers produces unwanted
outcomes because contractors might not be sufficiently sanctioned for low-
quality deliveries.
Another problem arises when contracts should be awarded to the lowest-
cost bidder.Procurement officers’ tasks are limited to checking whether offi-
cial specifications are fulfilled. A procurement official may detect that speci-
fications were incomplete or fulfilled only at face value. Contractors thus
look out for incomplete specifications and similar loopholes as a method for
making extra profits. In an attempt to avoid this, the principal tends to add
more detailed specifications. This increasing burden of specifications acts as
392 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 392
a deterrent to bidders and suffocates competition. Anechiarico and Jacobs
report evidence for such effects in New York City.
6
Rose-Ackermann criticizes
Kelman’s proposal for reform, fearing that risks for corruption and collusion
are downplayed.
7
The dismal experience with some procurement guide-
lines, she argues, should serve to adjust the guidelines, but not to end anti-
corruption. Alternative approaches to anti-corruption should be investigated
to determine if they prove more successful.For example, a less rules-based and
less top-down approach to anti-corruption may meet Kelman’s approval.
Principles-Based Anti-Corruption
Some authors have argued that instead of focusing on rules, the fight against
corruption should relate more to principles. This approach recognizes the
many non-monetary and intrinsic motivations of officials and employees and
honors their role for advancing common goals. Once these motivations are
understood, it might be possible to influence behavior with prevention, con-
trolling incentives, and fostering values within an organization.
There is a large body of economic literature that reveals how corruption
may result from adverse incentives.
8
Price or quantity restrictions may pro-
duce artificial shortages, where bribery serves as a market clearing device.
Import quotas, for example, produce an excess supply of export goods and
limited import licenses may be handed out in exchange for bribes.
There is consensus that anti-corruption efforts should identify such dismal
distortions and tend to avoid them, where possible. But apart from such pre-
scriptions it appears difficult to use incentives to induce integrity. Paying
someone a bonus for his or her honesty is impossible to implement. Incentives
can only be given for a measurable economic surplus. But there is no yardstick
that can measure honesty and the remuneration that it deserves. Second,
incentive schemes imply a variation in employees’ incomes,lowering the secu-
rity equivalent of their pay and crowding out the risk-averse (and potentially
less corrupt) from obtaining official positions. Incentive theory, at best, helps
to detect the variety of organizational inconsistencies and disincentives. But
incentives will hardly ever be sufficient to outbid the briber, as is sometimes
suggested by formal principal-agent modeling. Realistically, incentive schemes
may highlight and acknowledge individual integrity but they will fall short of
producing high-powered rewards.
Rather than focus on narrow payoffs, one approach to provide the right
incentives is to focus on group behavior. For example, Paine,as well as Kapstein,
and Wempe argue that integrity comprises more than following rules.
9
Getting Anti-Corruption Incentives Right 393
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 393
Integrity should aim at establishing a value system that provides guidance
even where rules are lacking. These scholars propose training methods,aimed
at coding desired behavior. These trainings can help to communicate more
clearly the conflicts of interest that are unique to specific sectors and countries.
Furthermore, ethical training can help to develop an atmosphere of trans-
parency and stewardship among a firm’s and a bureaucracy’s employees.
Rules and principles are both needed in anti-corruption efforts. Good
principles need the rules to become embedded and to serve as benchmarks for
behavior.In turn, rules without principles may backfire. For example,bribing
a public official is illegal, but the U.S. Foreign Corrupt Practices Act (FCPA)
allows favors to be given to well-connected private businesspeople, so called
“gift-partnerships,” or to engage (bribe-paying) intervening purchasers in
public procurement.
10
As long as businesspeople are (or claim to be) unaware
of what local agents do with their consultancy fees and commissions their
actions may be excused.Ironically,the clearer the rules on malfeasance are, the
clearer businesspeople are on how to circumvent them. Such an adverse effect
may be avoided if the underlying principles are communicated.
Ethical Investment Research Services (EIRIS) investigated the perform-
ance of almost 2,000 companies, rating whether a company had a code of
conduct; whether that code prohibited bribery, gifts, facilitation payments,
and political donations; whether whistle-blowing systems, ethical training,
and compliance structures existed; and how well companies communicated
these issues to their employees.
11
Small- and medium-sized companies scored
considerably lower compared to large companies.
12
While company-specific
details were not reported, this author dares to claim that multinational firms
known for their corrupt record obtained favorable scores. Laufer makes a
related point with respect to Enron, a firm that was highly esteemed for its
ethics management prior to its collapse.
13
Measurements such as those performed by EIRIS relate to simple rules.
Measuring a value system cannot be done in a checkbox manner. Where val-
ues are absent, companies may camouflage this deficiency with a compliance
system, but one that functions superficially. Such compliance systems can be
purchased from consultants and serve to eliminate responsibility if business
goes awry.
14
Compliance systems help companies to conduct business free of
regulatory scrutiny and corporate liability.
15
Such compliance systems risk being substitutes for, rather than comple-
ments to, values.They camouflage problems and do not invoke change. They
provide guidance on how to abide by formal rules in anti-corruption, but
394 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 394
leave incentives unchanged. For example, although Britain has signed the
OECD convention against the bribery of foreign officials, contrary to the con-
vention’s principles it stopped the Serious Fraud Office’s investigation into
bribes paid to Saudi Arabian officials.
16
This shortcoming is not a problem for only anti-corruption rules. Also
preventive measures sometimes do not aim at advancing a value system but
camouflage an organization’s true interests. Private firms,for instance, might
be in a prisoner’s dilemma, paying lip service to anti-corruption, but at the
same time profiting from a corrupt contract. Ethical training is given to those
expected to stay clean, while the dirty work is outsourced. In the end, ethical
training may simply provide firms with official excuses when their employees
are caught, resulting, for instance,in exemption from corporate liability.The
ethical training of bureaucrats likely faces similar limitations.
High penalties and stiff rules (for example on the taking of gifts and
expenses for dining) provoke employees to seek loopholes rather than follow
these new rules. Engagement with intermediaries or in joint-venture agree-
ments allow employees to abide by the new rules while the payment of bribes
continues. Although outsiders do the dirty work, those who are the target of
stiffer rules can claim ignorance about bribe payments. For example, in a
2006 survey of businesspeople, Control Risks Group reported that 32 percent
of U.S. companies believe that their competitors regularly circumvented anti-
corruption legislation by engaging intermediaries—a higher percentage than
in all other countries included in the survey (Germany, Britain, Netherlands,
France, Brazil).
17
The likely reason rests with the stiffer corporate anti-cor-
ruption legislation in the United States.
This effect does not only relate to individuals but also to group behavior
and collective reputation. Groups establish networks of cooperation, which
give rise to more intricate ways to react to rules. Groups may react either by
subordination or by collective resistance. Higher penalties, increased moni-
toring, or stiffer limits on discretion require acceptance by and support from
these networks. Such support is desperately needed as hints by insiders close
to an illegal deal are crucial for investigations.These hints require a corporate
culture of anti-corruption; an atmosphere where individuals are supported by
their colleagues when they cooperate with investigators.
18
In 2007 PricewaterhouseCoopers published the Global Economic Crime
Survey.This survey is based on telephone interviews with 5,428 CEOs, CFOs,
and other leading managers.
19
Respondents were asked about their initial
means of detecting fraud. Quite striking is the importance of internal and
Getting Anti-Corruption Incentives Right 395
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 395
external tip-offs.
20
These findings reveal the significance of a corporate culture;
a bottom-up approach to contain corruption.
In the United States (alongside the UK and Russia) initial detection seldom
comes from tip-offs (see Table 15-2).
21
A more participatory system, where
employees openly contribute to anti-corruption with tip-offs, seems to oper-
ate (at least when looking at relative numbers) in Switzerland, Germany, and
France. Palazzo argues that business ethics are more rules-based in the United
States, while they are more “community oriented” and more relational in
Europe.
22
Within such a model, managers are more trusting of their workers
and informal mechanisms for social control are given higher emphasis. Such
relationships contribute to a greater willingness to complain openly about
the malfeasance of superiors and thus contribute to more tip-offs in Conti-
nental European businesses. In the United States the most important method
for detection is internal audit, which has contributed to 21 percent of all
detections. This percentage is the highest figure for all countries surveyed,
suggesting a top-down, rules-based approach to corporate anti-corruption in
the United States.
396 Johann Graf Lambsdorff
Table 15-2. Initial Hints on Detection of Fraud, Percent of Cases
Corporate
Corporate Culture Control
Whistle-blowing Internal External Internal
Country system tip-off tip-off Audit
Russia 5 8 8 20
United Kingdom 3 14 9 19
United States 20 13 21
Denmark 7 26 7 19
Singapore 8 21 14 19
Czech Republic 16 18 7 18
South Africa 16 22 11 20
Norway 9181215
Thailand 15 19 12
Turkey 5212116
France 8 36 7 14
Germany 382614
Slovenia 30 15 11 11
Switzerland 4 26 30 9
Source: PricewaterhouseCoopers (2007) and authors’ composition of data from country
supplements.
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 396
Limiting the Leaders
Rules and prevention require an honest leadership that successfully contains
corruption among employees and bureaucrats. But fostering integrity among
the leadership is difficult. Governments (as well as company boards) must
limit self-seeking among their own ranks. Strong competition for leadership
positions, be it general elections for public offices or tournaments for eco-
nomic leadership positions, is commonly seen to be insufficient to prevent
malfeasance. Rather, press freedom and a high level of transparency con-
tribute to holding senior officers accountable.
23
This system provides a clear
motivation for bottom-up approaches to anti-corruption.
Non-governmental organizations (NGOs) and citizen watchdogs have
started to request more information on government operations, claiming
their right to access such information. These organizations put social pressure
on perpetrators, complain about malfeasance of administrators and politi-
cians, voice their concern with respect to political priorities, and blow the
whistle on criminals. Grassroots initiatives by civil society are a core contri-
bution to anti-corruption. For many multilateral institutions this shift toward
civil society has dramatically changed their daily operating procedures.
24
Building coalitions that surpass the classical boundaries of government has
become essential in the fight against corruption.
The importance of bottom-up approaches is also documented at the cross-
country level. Press freedom is clearly a bottom-up approach to improve
accountability in the public sector and ultimately to reduce corruption. While
causality is trickier to ascertain, there is substantial evidence that countries
with high levels of press freedom have lower levels of perceived corruption.
25
These correlations are robust even when controlled for standard influential
variables, for example income per head.
However, bottom-up approaches are not controlled as well by superiors as
are top-down approaches.At times, bottom-up approaches may conflict with
anti-corruption strategies that are chosen by business and political leaders.
Revelations of misconduct may come at an abysmal time.Such strategies may
not complement the other overall goals of an organization; these strategies
may even endanger the leadership itself. But the purpose of bottom-up
approaches is precisely that such approaches credibly commit a whole organ-
ization to anti-corruption efforts. Attempts fully to control anti-corruption
are similar to an autocratic regime that attempts to improve its international
reputation by controlling the state’s media, an approach that is not widely
approved.
Getting Anti-Corruption Incentives Right 397
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 397
Still, there are various problems and unanswered questions about bottom-
up initiatives. Representatives from civil society are sometimes attributed the
legitimacy to speak for the interests of a population at large, which is a dis-
putable development.
26
Some scholars feel that there are few altruistic actors
who may deserve such legitimacy outside elected government positions. Civil
society approaches to anti-corruption are also open to abuse. The most
extreme cases relate to NGOs in control of politicians who want to divert
international aid into their own pockets, There are some unresolved issues
relating to the proper role of NGOs and civil society in politics. However,
that bottom-up anti-corruption initiatives need a critical mass of supporters
in society is not disputed. Successful bottom-up initiatives must therefore
embrace more than a few altruistic actors in civil society. But is it possible to
recruit such actors?
Bottom-Up Anti-Corruption
There are many reasons to abstain from corruption apart from the extrinsic
motivations that are commonly considered. Containing corruption is not
related only to explicit top-down measures. Threats of punishment from
superiors and courts may not be the most important. “Homo homini lupus,
(man is a wolf to man) was Thomas Hobbes’s argument for a strong state.
In a top-down fashion this strong state would overcome the downside effects
of individual maximizing, including corruption. Contrary to Hobbes’
approach, a bottom-up philosophy asks why individuals may intrinsically
avoid corruption. Morality may have only a limited role. But corrupt actors
are influenced by factors such as the expected opportunism of their coun-
terparts.
27
A briber is commonly promised future favors,but often the briber
ends up paying twice or never receiving what he was promised. This unreli-
ability of corrupt counterparts may induce honesty among potential bribers
and good governance within organizations even where ethics are scarce.
This effect is labeled as the “invisible foot.” The unreliability of corrupt coun-
terparts induces honesty and good governance even in the absence of good
intentions.
28
There are related reasons why individuals prefer to commit to anti-cor-
ruption. Those who are willing to take bribes are of limited value to their
superiors and clients.
29
Governments have no interest in auditors who cannot
abstain from falsifying their reports. Companies equally seek to guard their
financial interests and would not employ auditors who are willing to take
bribes rather than report corporate fraud. Investors avoid countries where
398 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 398
governments cannot commit to protecting firms and their property rights.
Such governments suffer as a consequence from limited foreign direct invest-
ments. Further, governments will not hire tax inspectors if they give in to
temptations for extra income.
These effects, maybe much more than moral considerations, are responsi-
ble for the anti-corruption grassroots initiatives. Various business networks
have been established with the goal of (peer-) monitoring: members helping
each other commit to anti-corruption actions. Even for intermediaries, who
are sometimes the facilitators of corrupt deals, a network has been established
that aims at signaling honest dealings by its members.
30
In a similar spirit,
Transparency International has implemented the idea of Integrity Pacts, where
the procuring governmental department and all bidders agree on a monitor-
ing system and tailor-made penalties to avoid bribery in public procurement.
Such strategies must be encouraged to broaden the base for anti-corruption
at the grassroots level as bottom-up methods can embrace even those who are
tempted to pay and accept bribes.
Conflicts between Top-Down and Bottom-Up
Conflicts between top-down and bottom-up are standard in managerial sci-
ence. These conflicts have also been well recognized in business ethics.
31
But
this topic has been only slightly explored for anti-corruption. Evidence from
experimental investigations for labor markets reveals that a good deal of
employee behavior is based on intrinsic motivation, fairness, and reciprocity.
32
Employers may thus offer wage premiums so as to provide incentives for good
performance even if this performance cannot be observed. In addition,
employers may disregard applicants who are willing to work for low wages.
Most interesting, employers may blindly trust that their employees are per-
forming well. This type of trust often causes increased efforts among employ-
ees. To the contrary, increased monitoring often creates a certain level of dis-
trust that weakens the intrinsic motivation of employees and limits their
willingness to act with integrity.
33
Experimental evidence also reveals that intrinsic motivation may limit cor-
ruption. Frank and Schulze, in their investigation of individual tendencies to
engage in corruption in procurement, find that a significant number of par-
ticipants did not maximize payoffs, apparently as a result of intrinsic moti-
vations to abstain from corruption. In a later study, these scholars extended
their analysis and observed that threats of penalties dilute this intrinsic moti-
vation.
34
That is, some intrinsically motivated participants that may have
Getting Anti-Corruption Incentives Right 399
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 399
abstained from taking bribes were induced by the threat of penalties to follow
a maximizing strategy and take bribes.
There are other negative effects of top-down approaches. If penalties for
taking bribes are imposed without mercy,bureaucrats are prevented from act-
ing opportunistically.
35
For example, in a Bochum, Germany court case, an
employee of the road construction authority confessed to accepting bribes for
contracts to mark roads. Beginning in 1987, lacking business experience, he
had passed on names of competing firms in a public tender. After this inci-
dent, he received an envelope filled with DM 2,000 from the private firm
who obtained the favor. In court, the employee recounted: “Suddenly I knew
that I had begun to be at his [the briber’s] mercy.” This statement reveals
how an initial small payment made the employee dependent on the briber
and forced him to comply with the briber’s demands afterward.
36
Quite often,
a first-time small gift, taken by mistake,marks the starting point of a corrupt
career.The official is confronted with the threat of a potentially large penalty
for such a mistake. This threat makes him or her dependent on the complic-
ity of the corrupt counterpart, rather than serving as a watershed against
malfeasance.
We are short of a theory that reveals how to best balance top-down and
bottom-up approaches. But a top-down approach can avoid some of the
aforementioned repercussions by better integrating the bottom-up endeavors.
Leniency
Some anti-corruption activists employ the term “zero tolerance” to signal an
uncompromising attitude toward corrupt actors. This term is morally loaded,
and the attitude associated with it can backfire badly, as leniency can be an
effective means to encouraging bottom-up approaches.
First, while leniency may partially reduce the deterrent effect of penalties,
it is commonly assumed to lower enforcement costs and reduce future harm.
37
Second, sometimes insiders are trapped by minor malfeasance and unable to
report to prosecuting authorities who have committed to zero tolerance.
38
Nell investigates the criminal codes of fifty-six countries and detects that
twenty-six countries have leniency provisions for “active bribery,” that is the
payment of bribes, but only three have provisions for “passive bribery,the tak-
ing of bribes.
39
This situation is unfortunate as public servants need a method
to turn themselves in to prosecutors with the assurance of limited personal
repercussions. Public servants should thus be given incentives to blow the
whistle after having obtained a bribe.
400 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 400
Qualifications for leniency are divergent and some approaches have been
criticized. Firms are often sanctioned as a corporation if they fail to eliminate
employee malfeasance. Quite often, firms are not punished if they behave
properly as an organization and corruption is found to be related only to the
individual misconduct of their staff. As a result, leniency is often exercised if
proof that compliance systems exist is provided. Laufer argues that this type
of leniency reduces the repressive pressure of the legal code and even more
worrisome, it induces firms to invest in potentially useless compliance systems
rather than in eliminating actual misconduct.
40
A related problem with leniency arises when an organization, after being
suspected of malfeasance, accepts an outside monitor to impose internal
reforms. This approach is currently taken by the World Bank within its vol-
untary disclosure program and has gained prominence in the U.S. Justice
Department.
41
Such an approach is alleged to lower the deterrent effect of
corporate liability,while producing verifiable compliance systems with uncer-
tain outcomes. Proving compliance then produces an unusual game: firms
have incentives to produce evidence of compliance but do not have incentives
to install effective compliance systems that enhance ethical behavior.
42
This
method may explain the finding by Ernst and Young who report that U.S.sen-
ior executives consider allegations of bribery or corrupt business practices to
be predominantly unpleasant because they increase compliance costs.
43
This problem arises in particular because those who engage in the com-
pliance service industry and the associated regulatory bodies tend to overes-
timate the capacity of their top-down methods to actually reduce corrup-
tion. If the results displayed in Table 15-1 are also valid for corporate
anti-corruption, which is not an unreasonable assumption, the capacity of
top-down rules to reduce corruption is lower than commonly estimated.
Leniency would in this case be linked to the wrong action. Thus leniency
should not be given to firms merely based on the idea that these organizations
have good compliance systems.Such leniency is misleading as the effectiveness
of compliance systems is difficult to evaluate by outsiders. Such systems can
be afforded only by large companies, and they lead firms to employ ineffec-
tive anti-corruption efforts. Other forms of leniency provisions are superior
in reducing corruption.
Lambsdorff and Nell modeled optimal penalties in bribery transactions
and investigated the effect of leniency as an instrument for containing cor-
ruption.
44
They found that leniency in exchange for self-reporting can lower
the incentives to become engaged in corruption if all of the following condi-
tions are met: 1) self-reporting must actually increase external investigators’
Getting Anti-Corruption Incentives Right 401
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 401
knowledge; 2) self-reporting must help in prosecuting others, and 3) leniency
should only be given to successful corrupt actors.These conditions ensure that
corrupt partners have an incentive to report each other.
While leniency in exchange for self-reporting is widely employed, the three
conditions mentioned above are hardly ever matched. The third condition in
particular requires some explanation. In the case of self-reporting, leniency
should not be given to businesspeople who were cheated by public servants.
Leniency in such a case would provide businesspeople with a credible threat
to blow the whistle, which then forces the public servant to deliver on his or
her promises. This threat buttresses the corrupt agreement and bottom-up
anti-corruption endeavors are countered.
45
Leniency should be granted only
to those businesspeople who did obtain the requested corrupt service. Like-
wise, public servants who were cheated and not given a bribe should not qual-
ify for leniency. In summary, one should give leniency in exchange for self-
reporting, but not to those who have participated in incomplete bribe
transactions.
An additional concern is whether a regulatory or prosecutorial body should
have the discretion to grant leniency. Overall, discretion should be limited as
judges’ and prosecutors’ commitments may not be credible. It is not uncom-
mon that those cooperating with the authorities often receive a higher pun-
ishment than negotiated with the prosecutors, so that leniency remains inef-
fective and a promise of such is seen as empty. The above-mentioned
recommendations may not be in line with prosecutors’ ideas of fairness and
deterrence. For example, if an entrepreneur self-reported after having
obtained a contract, he can still be made rich by the deal and only mildly
punished. While a commitment to such a penalty design is desirable for reduc-
ing corruption, prosecutors and judges,who are endowed with sufficient dis-
cretion, may dislike enforcing such an apparently unfair outcome. Prosecutors
and judges are also susceptible to misusing their discretionary power. In the
worst case, they would grant leniency in exchange for favors, increasing cor-
ruption in the judicial system rather than helping to deter corruption. Thus,
clear rules on leniency provision are superior to discretionary applications.
Some discretion along the lines of the above-mentioned conditions, still, is
unavoidable. Prosecutorial authorities must impartially determine how far
self-reports have advanced prosecutors’ knowledge beyond existing investi-
gations, to what extent self-reports can be helpful in prosecuting others, and
whether corrupt transactions were completed.
Interestingly, certain legal provisions are likely to stabilize corrupt transac-
tions rather than to discourage them. Former Article 215 (2) of the Turkish
402 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 402
Penal Code stipulated that leniency should be granted only if the public offi-
cial had not yet reciprocated on the bribe, contrary to the recommendations
above.
46
Remarkably, according to this article,the bribe-giver, if self-reported,
could reclaim the bribe. A culture of anti-corruption that tries to increase
the risks of bribery is seriously undermined by such legislation.
Debarment
That companies, not individuals, should be punished for malfeasance so as to
provide incentives for improving corporate culture is a broadly accepted con-
cept. Where such penalties are lacking, firms may pay lip service to anti-cor-
ruption but unofficially inform their employees that getting contracts is all
that counts. But how companies should be punished remains uncertain.
Debarment and suspension of companies is an often recommended penalty
and is applied in public as well as private procurement. After this system was
implemented by the U.S. Department of Defense in 1983 many other coun-
tries and private companies followed this precedent.
There are many problems with this system, though. If a criminal convic-
tion by court is required, such as in South Africa and in the EU, debarment is
often imposed only after years of legal dispute. The debarment then may
impact a completely altered company, now operating under a different lead-
ership and shareholder structure. The burden of proof to convict is also high,
suggesting that many cases would be decided in favor of the briber where
reasonable doubts remain. The conviction process can be sped up by dele-
gating the authority to debar to procurement officers, which is the standard
in the United States. But such an allocation of authority risks losing a clear
legal basis for debarment, potentially implementing the punishment without
definitive evidence.
A second issue is whether procurement agencies should have the discretion
to decide if bids from debarred firms should or should not be considered. If
the agencies are granted such discretion, important considerations for their
decisions could be recognized, such as whether a supplier is indispensable or
whether the supplier has contributed to uncovering a corruption case and
proactively contributed to the investigation. But a discriminatory application
of debarment can easily undermine its legitimacy. For example, Karpoff and
colleagues carried out a statistical analysis of the stock market valuation of
U.S. defense procurement contractors that were suspended between 1983 and
1995.
47
Following the announcement of these suspensions, the stock market
valuation of the respective companies dropped on average by 4.5 percent.
Getting Anti-Corruption Incentives Right 403
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 403
This effect was less pronounced for the government’s most important con-
tractors. Those ranked as important (from a list of 100 most important in all
sectors) experienced only a 1.4 percent drop, whereas the remaining less
important companies suffered a 14.1 percent decrease in their stock market
valuation. This finding is likely related to the higher influence exerted by the
former companies. The authors concluded that influential contractors bene-
fit from these suspensions as they pay small fines but profit from the reduced
competition that results from the debarment system. The authors found fur-
ther that influential contractors did not experience a decrease in overall gov-
ernment contracts following a suspension. They report anecdotal evidence
that contracts were postponed until the end of the contractors’ suspensions,
that these contractors obtained contracts as subcontractors, or that they prof-
ited from bureaucratic discretion such that contracts were awarded in spite of
their being debarred.
Further, the penalty that results from debarment often does not correlate
well with the magnitude of the criminal act. A small grease payment may
ruin a firm that depends on government contracts, while a substantial kick-
back remains without consequence for a firm that does not intend to compete
for future government contracts. Overall, the impact of debarment on a cor-
porate anti-corruption culture remains uncertain. The impact may in fact
become negative as bottom-up efforts are discouraged and companies that
proactively report the malfeasance of their staff are still threatened with debar-
ment. This predicament may prevent companies from reporting relevant cases
to prosecutors and procurement agencies. Companies will instead threaten
internal whistleblowers and try to suppress the relevant evidence. Firms
should thus be given incentives to cooperate with prosecutors after their
employees have finalized a corrupt deal. Such incentives are difficult to imple-
ment in systems of debarment.
Nullification
Courts commonly do not enforce agreements made by means of corrupt
transactions. Instead, courts follow the principle that those who operate out-
side the law cannot claim the law’s protection. Corrupt contracts are thus
null and void. The nullity of the corrupt contract often entails a further legal
consequence: bribes cannot be reclaimed, irrespective of whether or not the
promised corrupt favor was delivered. Such a consequence presents a severe
risk to bribe payers, evidenced in many cases of failed corrupt transactions.
48
404 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 404
This legal judgment by the courts is important for anti-corruption as it helps
to increase the risks for corrupt actors and thus serves to reduce corruption.
To what extent courts worldwide adhere to this principle and to what extent
civil laws are in line with it should be further investigated.
Some anti-corruption activists go further in their requests for nullification.
Consider a contract for government construction that is induced by a bribe
to a procurement official. Pope argues that governments should have the right
to declare the construction contract void. Nullity would not only result for the
corrupt side-agreement, but for the main contract.
49
Similar provisions are
now found in various government procurement guidelines and those of pri-
vate firms.
Such a practice has a dismal effect on bottom-up anti-corruption. For
example, construction firms that find that their employees paid bribes are
unwilling to cooperate with prosecutors and the government,fearing the nul-
lity of their profitable contracts. Whistleblowers in these companies risk their
jobs and stay silent instead. Furthermore, only companies that were success-
ful in bribing are sanctioned by this type of penalty. Those that paid bribes but
failed to get the contract can threaten self-reporting because they are not hurt
by the nullity of a contract that they do not possess. Nullity thus stabilizes cor-
rupt transactions rather than inducing corrupt partners to cheat each other.
Finally,if the government is uncertain about the profitability of a contract
it may delegate negotiations to its most corrupt bureaucrats. If these corrupt
bureaucrats take bribes, rules on nullity provide the government with the
option to cancel the contract at a later stage. By threatening cancellation the
government can also blackmail these companies and request better condi-
tions. As with debarment, only the influential firms can withstand this type of
extortion. As a result of this process,the government loses the incentives that
prevent its bureaucracy from bribe-taking.
50
The German company Siemens was investigated by prosecutors, the media,
and internal and external investigators because of slush funds that were being
amassed to bribe officials. Reacting to public pressure in 2006, a new leader-
ship at Siemens introduced immense efforts to comply with anti-corruption
standards. This openness in dealing with the problem, however, backfired.
Many contracts that were obtained in the past by way of bribery were nulli-
fied and had to be renegotiated, often with less favorable conditions. Other
German companies did not follow the good example set by Siemens, fearing
also that their contracts would be nullified. Ultimately, these other firms are
likely to fail in rebuilding their corporate culture.
Getting Anti-Corruption Incentives Right 405
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 405
Contract Penalties
In addition to debarment and nullification some procurement guidelines
entail provisions for contract penalties. These penalties are implemented in
the form of payments made by the contractor if bribery is detected. Such
penalties have various advantages.
51
First, these penalties merely shift
resources from one party to another and do not entail further social costs.
Contrary to this method, debarment produces disadvantages to the public by
limiting competition, while the nullification of contracts imposes costs for
repeated negotiation and delays. Second, in a system with monetary penalties,
civil courts (or arbitrators) provide conflict resolution, where there is a less
stringent burden of proof. The risk of a wrong judgment is thus more fairly
shared among the contracting parties. On the contrary, criminal courts may
fail in deterring acts where reasonable doubts of misconduct remain. Third,
once imposed, monetary penalties can later be revoked,without substantially
disadvantaging the contractor. Debarment and nullification, on the other
hand, produce social costs that cannot be recovered if a court’s decision is
reversed at a later stage. Penalties can be imposed quickly; a reversal of this ini-
tial decision comes at a mild cost. Contract penalties are thus an attractive
option for public, as well as private, contracting.
The size of the penalty is sometimes linked to the contract value. For exam-
ple, the procurement guidelines of Deutsche Bahn AG (German Railways)
invoke penalties of 2 percent, 5 percent, or 7 percent of the gross contract
value, depending on the seniority of the briber in the contracting firm.
52
This
approach, however, is not the best. On the one hand, the gross contract value
is a poor basis for determining the size of the penalty. The temptation to pay
a bribe is proportional to the net profit that can be achieved with a success-
ful bribe. In some sectors such as retail and banking, gross revenues are large
and deterrence is therefore sizable. In services such as consultancy contracts,
the opposite is true, where few costs are subtracted from gross revenues, pro-
ducing large incentives to pay bribes. On the other hand, bribes differ with
respect to their severity. A small gift to a secretary should not entail the same
legal consequences as a large kickback to a senior official or manager. Thus, a
better base for penalties would be the size of the bribe (or favor).
53
Given that
bribes often tend to be small, to achieve sufficient deterrence fifty times the
size of a bribe may be a sufficient contract penalty.
54
Another issue is who should be the recipient of the monetary penalty. If the
penalties accrue to the procurement authority (and the principal behind it)
there is an adverse incentive: the procurement authority profits from its own
406 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 406
organizational failure. A possible adverse repercussion is that the principal will
allow its employees to take bribes so as to request the monetary penalty there-
after.A better solution is to assign the penalty to a charity, perhaps after costs
for the criminal investigation are subtracted. Another solution is to assign
rights to restitution to the unsuccessful bidders, which can be claimed from
the collected monetary penalty. Rewards to whistleblowers may also be paid
from these funds.
A third question is how anti-corruption efforts should deal with compa-
nies that proactively report the bribery of their own staff. Leniency should be
guaranteed in this case, perhaps reducing the penalty to ten times the bribe.
This design reveals a clear advantage of contract penalties over different
penalty schemes. The reduction in the penalty can be transparent and
announced upfront, assigning more apparent legal rights to a firm that comes
forward with evidence. On the contrary, debarment systems may also attempt
to treat cooperating firms more leniently but risk a less transparent decision,
favoring the influential firms.
Despite these advantages, in practice contract penalties are only seldom
applied. The reasons for this failure are unclear. Such penalties may not pro-
vide advantages to influential firms, suggesting that there are political-eco-
nomic reasons for these firms’ disregard for such penalties. Transparency
International considers contract penalties in its integrity pacts; clearly such
penalties deserve more application and research.
Whistle-Blowing
Whistle-blowing systems, such as hotlines, are a first step toward bottom-up
anti-corruption. But effective whistleblowing systems must go beyond tele-
phone hotlines where anonymous hints can be submitted. More elaborated
internet-based systems have been developed, that allow prosecutors or com-
pliance officers to interrogate the whistleblower, while the anonymity of the
whistleblower is retained. Another approach is to have ombudsmen outside
the company that serve as a contact to discuss issues of corruption with
whistleblowers while being legally bound to keep the identity of their inform-
ants confidential. This more personal approach may be better suited for some
whistleblowers, but it may also be difficult to implement for a multinational
company with employees scattered around the globe.
Stringent compliance rules are often helpful to whistleblowers. Such rules
distinguish right and wrong and tend to encourage the reporting of malfea-
sance. But what should whistleblowers do if they observe that rules are being
Getting Anti-Corruption Incentives Right 407
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 407
skillfully circumvented? And how should superiors react to such whistle-
blowers? A whistleblower may report that his or her firm’s payments to inter-
mediaries were passed on to public officials, thus qualifying as bribery. Such
a report puts a company in an uncomfortable position and may even induce
a criminal liability of the company’s board. Some companies hide behind
their pro-forma compliance rules: their intermediaries have signed anti-cor-
ruption codes and no hints exist that payments have been given to public
officials. Thus there appears to be no need to investigate further. In these
cases, a whistleblower obtains little support for his actions. Anti-corruption
environments should provide a forum for discussion rather than discourage
employees from reporting by posting rigid rules. A true anti-corruption cul-
ture requires increased due diligence and leaders that seek to clear their com-
panies of all allegations.
Such an anti-corruption approach does not seem to be common practice.
Instead, whistleblowers are often frustrated. In some countries, such as Ger-
many, employees can be fired and face prosecution for reporting their com-
pany, even in cases of severe malpractice.A culture of anti-corruption requires
that whistleblowers be treated with leniency, even if they provide information
to third parties. Those that make the allegations must be legally protected
against harassment and be given the right to inform third parties in cases of
severe malpractice.
To build such an environment, codes of conduct must be developed from
the bottom-up and constantly readjusted. In reality codes of conduct are often
written by external experts, imported from benchmark companies, and sim-
ply distributed to a firm’s staff.
55
Ex-cathedra indoctrination on corporate
ethics is likely to fail where real dilemmas arise. Even when employees are
requested to confirm and approve these codes of conduct, the codes are not
made part of the corporate or public culture. Kapstein’s well known claim that
“a code is nothing, coding is everything” deserves more recognition as a bot-
tom-up method for developing a corporate culture of anti-corruption. Train-
ing employees in the detection of red flags can also enhance a bottom-up cul-
ture. Such training sharpens employees’ awareness of gray areas where rules
are still absent. To encourage the discussion of these gray areas further,
helpdesks should be available for those seeking immediate advice. Such
helpdesks (either by telephone or via internet) allow employees to voice their
questions, concerns,or fears without making them known to their peers, sub-
ordinates, and superiors. Compliance offices must become responsive to the
views contributed by employees. Without this bottom-up support, the rules
invented by compliance offices will be futile or even counterproductive.
408 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 408
Policy Implications
By exploiting the concept of the invisible foot, anti-corruption efforts can be
effectively organized.
56
This concept embraces two issues. First, economic
actors want to commit to anti-corruption approaches as a means to preserve
their reputations with their superiors and clients. This intrinsic motivation
must be recognized and encouraged. Second,corrupt actors must be seduced
to betray each other so as to destabilize corrupt transactions.
In this light, a comprehensive anti-corruption strategy must embrace both
top-down and bottom-up elements. This chapter demonstrates that merci-
less penalties, debarment, and the nullification of contracts that are influ-
enced by bribery fail. Such top-down approaches are in conflict with bottom-
up endeavors to contain corruption. If only such top-down strategies are
applied, companies will find themselves trapped in a vicious cycle, as malfea-
sance in the past implies penalties without pardon, lost contracts, and debar-
ment from future contracts. Such a cycle entices companies to continue their
illicit operations. In the public sector, likewise, public officials find them-
selves trapped after a minor error, as taking a gift qualifies one for harsh
penalties. Public officials then are at the mercy of the bribers, who can force
them into corrupt careers.
This chapter suggests methods for reconciling bottom-up endeavors with
top-down rules. It suggests rules on leniency that serve to encourage bottom-
up actions against corruption. If leniency is given to public servants who
obtained bribes, self-reporting may be encouraged, helping them to end their
corrupt career.Leniency should also be offered to bribers in exchange for self-
reporting but only if the bribers were successful in obtaining the desired favor
(for example a contract). Such a system helps to catch the higher-ups and
renders bribe-taking a risky business. Contract penalties in public and private
contracting can also work well, in particular when joined with rewards given
to whistleblowers and with leniency for self-reporting.
Contrary to these recommendations, leniency is often given in exchange for
documented anti-corruption efforts. This method is likely to fail as the suc-
cess of anti-corruption efforts is extremely difficult to measure and often
overestimated. Such provisions will favor the large and influential firms that
can afford costly compliance programs.
Siemens has now imposed strict rules on gift-giving and dining, fixing the
maximum allowances to levels below business standards. Similar rules are
often defended on the premise that one must safeguard against the initial
temptations of corruption. However, there are various problems with such a
Getting Anti-Corruption Incentives Right 409
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 409
strategy. Due to such rigid rules some employees are captured in a circle of
corrupt complicity after an initial minor error.Others simply dislike the moral
rigor and feel less inclined to contribute to the development of a corporate
culture of anti-corruption. Groups may (and already did in the case of
Siemens) revolt against the excessively authoritarian tone of such rules. This
measure may have done more harm than good.
Anti-corruption is a deserving crusade where ethical considerations are
necessary to provide guidance to key actors. But morality is an insufficient
guide. Instead, incentives must increase the risks of corrupt behavior and
highlight the economic returns from acting with integrity.
Notes
1. See United Nations Office on Drugs and Crime, The Tenth United Nations Sur-
vey on Crime Trends and the Operations of Criminal Justice Systems (Tenth CTS
2005–2006), (2008), available at www.unodc.org/unodc/en/data-and-analysis/Tenth-
CTS-access.html (accessed 16 January 2009).
2. Stefan Voigt, Lars P. Feld and Anne van Aaken,“Power over Prosecutors Cor-
rupts Politicians: Cross Country Evidence Using a New Indicator,CESifo Working
Paper No.2245 (Munich, 2008).
3. Thomas Stratmann, “Do Strict Electoral Campaign Finance Rules Limit Cor-
ruption?” CESifo DICE Report 1, (Munich, 2003), 24–27.
4. In this respect it must be pointed out that lagged variables in the regressions
may have better captured the underlying logic. Unfortunately, these variables are
unavailable.
5. Steven Kelman, Procurement and Public Management: The Fear of Discretion and
the Quality of Public Performance (Washington,D.C., 1990); Steven Kelman,“Remak-
ing Federal Procurement,The John F. Kennedy School of Government Series Visions on
Governance in the 21st century, Working Paper No. 3 (Cambiridge, MA, 2003).
6. Frank Anechiarico and James B. Jacobs, The Pursuit of Absolute Integrity: How
Corruption Control Makes Government Ineffective (Chicago, 1996).
7. Susan Rose-Ackerman, Corruption and Government: Causes, Consequences, and
Reform, (Cambridge, MA, 1999), 60–63.
8. See Rose-Ackermann, Corruption and Government, 9–17; Johann Graf Lamb-
sdorff, The Institutional Economics of Corruption and Reform. Theory, Evidence and Pol-
icy, (Cambridge, MA, 2007), 2–12, 59–61.
9. Lynn Sharp Paine, “Managing for Organizational Integrity,Harvard Business
Review, LXXII (1994), 106–117; Muel Kaptein and Johan Wempe, “Twelve Gordian
Knots When Developing an Organizational Code of Ethics,Journal of Business Ethics,
XVII (1998), 859.
410 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 410
10. See Theodore H. Moran, “Combating Corrupt Payments in Foreign Invest-
ment Concessions: Closing the Loopholes, Extending the Tools,” (Washington, D.C.,
2008), available at www.cgdev.org/files/15197_file_CombatingCorruption.pdf
(accessed 12 January 2009); Theodore H. Moran,“How Multinational Investors Evade
Developed Country Laws,Center for Global Development Working Paper No. 79
(2006); Lambsdorff, New Institutional Economics of Corruption, 145–147, 167.
11. See EIRIS, “Corporate Codes of Business Ethics: An International Survey of
Bribery and Ethical Standards in Companies,Research Briefing, (2005), available at
www.eiris.org/files/research%20publications/corporatecodesofbusinessethicsep05.pdf
(accessed 13 January 2009).
12. This is also noted by Erikson who argues that small- and medium-sized com-
panies cannot afford the costs of compliance systems. But in such companies the
tone at the top is key to the corporate value system. A clear commitment to anti-
corruption by the leadership must be implemented. See Daniel P. Erikson,“Compliance
by Small and Medium-Size Enterprises (SMEs),” in François Vincke and Fritz Heimann
(eds.), Fighting Corruption: A Corporate Practices Manual (Paris, 2003), 179–186.
13. See William S. Laufer, Corporate Bodies and Guilty Minds: The Failure of Cor-
porate Criminal Liability (Chicago, 2006), 100.
14 See Jennifer Arlen,“The Potentially Perverse Effects of Corporate Criminal Lia-
bility,Journal of Legal Studies, XXIII (1994), 833–867.
15. See Laufer, Corporate Bodies, 101.
16. See Sope Williams, “The BAE/Saudi Al-Yamamah Contracts: Implications in
Law and Public Procurement,International and Comparative Law Quarterly, LVII
(2008), 200–209.
17. See Control Risks Group, “International Business Attitudes to Corruption—
Survey 2006,” (2006),available at www.crg.com/PDF/corruption_survey_2006_V3.pdf
(accessed 16 January 2009).
18. Dixit and Easterly elaborate on this issue more generally. They argue that top-
down and rules-based systems may destroy bottom-up informal systems. This effect
arises because malfeasance in the latter system is less harmful to the perpetrators than
in the former, as the perpetrators can easily shift their activities to the rules-based sys-
tem. The incentive to guard ones reputation is thus reduced. A similar argument can
be made with respect to anti-corruption. Top-down rules can weaken networks that
aim to contain corruption because individual members experience less of a need to
establish a reputation as committed to anti-corruption. See Avinash K. Dixit, Law-
lessness and Economics: Alternative Modes of Governance (Princeton, 2004); William
Easterly,“Institutions: Top Down or Bottom Up?”American Economic Review: Papers
& Proceedings, XCVIII (2008), 95–99.
19. PricewaterhouseCoopers, “Economic Crime: People, Culture and Controls:
The 4th Biennial Global Economic Crime Survey,” (2007), available at www.pwc.com/
extweb/pwcpublications.nsf/docid/1E0890149345149E8525737000705AF1/$file/PwC
Getting Anti-Corruption Incentives Right 411
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 411
_2007GECS.pdf (accessed 16 January 2009). Country supplements are available at
www.pwc.com/extweb/insights.nsf/docid/6C0D9D7B1B02B1F18525736F00508A9F
(accessed 16 January 2009).
20. Anecdotal evidence assigns higher importance to such tip-offs. Once tip-offs are
provided, internal auditors sometimes detect evidence of further malfeasance by the
same actor or misbehavior of other actors in the same department. Such detections are
likely to be attributed solely to the auditor. Internal auditors often paint such a picture
to boost their reputation within the company.
21. The Sarbanes-Oxley Act in the United States explicitly requires that corporate
whistleblowing systems be organized. One would have thus expected a higher rele-
vance for whistleblowing in the United States. This issue seems to be more than out-
balanced by the other issues mentioned in this section.
22. See Bettina Palazzo, “Habits of the Heart in US-American and German Cor-
porate Culture,” in Walther Ch. Zimmerli, Markus Holzinger,and Klaus Richter (eds.),
Corporate Ethics and Corporate Governance (Berlin, 2007), 55–63.
23. There are,however,also some problems with increased transparency.One con-
cern is that transparency may support the monitoring of corrupt reciprocity. See Lam-
bros Pechlivanos, “Self-Enforcing Corruption: Information Transmission and Orga-
nizational Response,” in Johann Graf Lambsdorff, Mathias Schramm, and Markus
Taube (eds.) The New Institutional Economics of Corruption—Norms, Trust, and Reci-
procity, (London, 2004), 93–111. Imagine a procurement board that publishes the
individual votes of its members. This increased transparency may backfire because it
helps bribers monitor whether their payment to an individual member of the board
was reciprocated. To the contrary, lack of transparency (in this case non-publication
of individual votes) would make it easier for a board member to take bribes and cheat
the briber. Likewise, non-transparent bureaucracies may at times prevent corruption,
because bribers would have a hard time 1) finding the right person to bribe and 2)
observing whether the bribee reciprocates honestly. In a similar spirit, it is standard
practice that public procurement requires some limits on transparency: bidders should
not know their competitors’incoming bids. Some secrecy must prevail until all bids are
jointly opened. Bid-rigging would be facilitated if transparency is introduced at the
wrong stage. Transparency, therefore, needs to undergo a more fine-tuned interpreta-
tion. Instead of advocating unlimited disclosure of information, comprehensive infor-
mation management systems that provide key data to stakeholders should be put in
place. These systems’designs will remain important issues for the years to come.
24. For a recent example concerning the World Bank policy of combining top-
down and bottom-up initiatives see http://info.worldbank.org/etools/BSPAN/
PresentationView.asp?PID=1685&EID=808 (accessed 16 January 2009).
25. See Lambsdorff, New Institutional Economics of Corruption, 46–47.
26. See Bj_rn M_ller,“Civil Society Romanticism: A Skeptical View.Reflections On
Håkan Thörn’s Solidarity Across Borders,Copenhagen Peace Research Institute, COPRI
Working papers No. 31, (Copenhagen, 2002).
412 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 412
27. Lambsdorff and Björn Frank, “Corrupt Reciprocity—an Experiment,”Discus-
sion Paper of the Economics Faculty of Passau University No.51–07, (Passau, 2007).
28. See Lambsdorff, New Institutional Economics of Corruption.
29. Ibid., 58–108.
30. See the online presentation at www.traceinternational.org, (accessed 16 Janu-
ary 2009).
31. See Muel Kaptein, Ethics Management. Auditing and Developing the Ethical
Content of Organizations (Dordrecht, 1998).
32. See Colin Camerer, Behavioral Game Theory: Experiments on Strategic Interac-
tion (Princeton, 2003), 95–100.
33. See Donald Lange,“A Multidimensional Conceptualization of Organizational
Corruption Control,” Academy of Management Review, XXXIII (2008), 710–729;
Guido Palazzo, “Organizational Integrity—Understanding the Dimensions of Ethical
and Unethical Behavior in Corporations,” in Zimmerli, Holzinger, and Richter (eds.),
Corporate Ethics and Corporate Governance (Berlin, 2007), 124.
34. See Björn Frank and Günther G. Schulze, “Does Economics Make Citizens
Corrupt?” Journal of Governance, IV (2003), 143–160; Günther G. Schulze and Björn
Frank,“Deterrence versus Intrinsic Motivation: Experimental Evidence on the Deter-
minants of Corruptibility,Economics of Governance, IV (2003), 143–160.
35. See Lambsdorff and Mathias Nell, “Fighting Corruption with Asymmetric
Penalties and Leniency,CeGe-Discussion Paper No. 59, (2007); Lambsdorff and Frank,
“Corrupt Reciprocity.
36. See Lambsdorff, New Institutional Economics of Corruption, 158.
37. See Steven Shavell, Foundations of Economic Analysis of Law (Cambridge, MA,
2004), 523–524.
38. This type of “entrapment” is emphasized by Shavell. See Shavell, Foundations
of Economic Analysis of Law. A related argument is brought forward by advocates of
“marginal deterrence.” See Shavell, Foundations of Economic Analysis of Law, 518. The
idea is to deter more harmful acts because their sanctions exceed that for less harm-
ful acts. If penalties for accepting gifts are already large, bureaucrats are less deterred
from providing the promised favor in return.
39. See Mathias Nell, “Strategic Aspects of Leniency Programs for Corruption
Offences: Towards a Design of Good Practice,”Discussion Paper of the Economics Fac-
ulty of Passau University No. 52–07, (Passau, 2007).
40. See Laufer, Corporate Bodies, 99–129.
41. See “Leniency for Big Corporations in the U.S.,International Herald Tribune
(9 April 2008).
42. See Kimberly D. Krawiec,“Organizational Misconduct: Beyond the Principal-
Agent Model,Florida State University Law Review, XXXII (2005), 571–615.
43. Ernst &Young, Corruption or Compliance: Weighing the Costs, 10th Global Fraud
Survey (2008), available at www.ey.com/global/Content.nsf/International/AABS_-_
RAS_-_FIDS_-_10th_Global_Fraud_Survey (accessed 16 January 2009).
Getting Anti-Corruption Incentives Right 413
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 413
44. See Lambsdorff and Nell,“Fighting Corruption.” The argument has some rela-
tion to the one provided in Arlen, “Potentially Perverse Effects.” She notes that cor-
porations that are facing liability may lose the incentive to monitor their employees:
they fear that knowledge of misconduct may deem them liable. Arlen points out that
these adverse effects can be overcome if information that is disclosed by a corporation
cannot be used against it in criminal litigation. This is only a small incentive. Broader
guarantees of lenient treatment in cases of self-reporting may provide for even
stronger incentives.
45. See Paolo Buccirossi and Giancarlo Spagnolo, “Leniency Policies and Illegal
Transactions,Journal of Public Economics, XC (2006), 1281–1297.
46. See Silvia Tellenbach, “Türkei,” in Albin Eser, Michael überhofen, and Barbara
Huber (eds.), Korruptionsbekämpfung durch Strafrecht, (Freiburg, 1997), 642.
47. See Jonathan Karpoff,D. Scott Lee,and Valaria P. Vendrzyk,“Defense Procure-
ment Fraud, Penalties and Contractor Influence,Journal of Political Economy, CVII
(1999), 809–842.
48. See Lambsdorff, “Making Corrupt Deals: Contracting in the Shadow of the
Law,Journal of Economic Behavior and Organization, XLVIII (2002), 221–241.
49. See Jeremy Pope, “The Transparency International Source Book 2000—Con-
fronting Corruption: The Elements of a National Integrity System,” (Berlin, 2000),
available at www.transparency.org/sourcebook/ (accessed 16 January 2009).
50. See Nell and Harald Schlüter, “Rechtswirksamkeit auf Schmiergeld beruhender
Hauptverträge—Eine ökonomische Analyse,Neue Juristische Wochenschrift (NJW),
XIII (2008), 895–896.
51. This type of penalty is widely recognized in the literature. See A. Mitchell Polin-
sky and Steven Shavell, “The Theory of Public Enforcement of Law,” in Lawrence E.
Blume and Steven N. Durlauf (eds.), The New Palgrave Dictionary of Economics (New
York, 2008) (2nd edition).
52. The United States Sentencing Commission uses the value of a contract and the
size of bribes as a basis for the size of penalties.
53. See A. Mitchell Polinsky and Steven Shavell, “law, public enforcement of,The
New Palgrave Dictionary of Economics Online (New York, 2008), available at www.
dictionaryofeconomics.com/search_results?q=law%2C+public+enforcement&button_
search=Search (accessed 24 April 2009). They emphasize the general principle that
penalties should be equal to the social harm of an act divided by the probability of
detection. This equation is motivated by the idea that individuals should carry out acts
that violate criminal codes if the individual benefit exceeds the public harm. The pub-
lic harm of corrupt acts is difficult to determine, however. What is the harm of a con-
tract secured by help of a bribe if this contract would have gone to another bribe pay-
ing company anyhow? Also loss of reputation produces a harm that is difficult to
measure. Relating penalties to the size of the bribe would be a feasible second-best
alternative. Two further issues run in favor of this solution: First, the size of bribes is
414 Johann Graf Lambsdorff
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 414
better linked to the actual gravity of the criminal misconduct. Second, the probabil-
ity of detection can be increased where public harm is particularly high, making sure
that bribery does not become a dominant strategy in areas that are particularly detri-
mental for the public.
54. There are cases where the size of bribes or favors cannot be determined.A pro-
curement officer,for example, may fail to report a conflict of interest and award a con-
tract to a close relative. A “market value” for a bribe should be estimated in this case,
using evidence on bribery in related cases.
55. See Kaptein and Wempe, “Twelve Gordian Knots,” 857.
56. See Lambsdorff, New Institutional Economics of Corruption, 225.
Getting Anti-Corruption Incentives Right 415
15 0328-0 ch15.qxd 5/18/09 11:33 AM Page 415
... Such a typology would also support on-going efforts to understand the features and blind spots that various anti-corruption policies entail. While interesting and useful, existing classifications of anti-corruption interventions (Huberts 1998;Brunetti and Weder 2003;McCusker 2006;Lange 2008;Dish et al. 2009;Lambsdorff 2009;Blind 2011;Graycar 2015;Holmes 2015) are often unidimensional and not broad enough to embed anticorruption policies within their wider context. A recent contribution to the literature in this regard (Jancsics 2019) overcomes the unidimensional issue but still does not account for the wide range of policy tools available to counter corruption. ...
... Existing classifications (Huberts 1998;Brunetti and Weder 2003;McCusker 2006;Lange 2008;Dish et al. 2009;Lambsdorff 2009;Blind 2011;Graycar 2015;Holmes 2015; Jancsics 2019) often do not consider the different steps of the policy process, focusing only on the policy design or on policy evaluation, and rarely address the conceptual and ideological groundings of the policies under study. Furthermore, they are mostly centered on features of corruption found predominantly in developing countries and leave behind other relevant determinants of corruption in developed countries (Graycar and Monaghan 2015). ...
Article
Full-text available
In recent decades, the number of anti-corruption policies developed in the public sector increased considerably. However, existing attempts at classifying them do not fully address the complexity of corruption types, risk factors, and policy environments. Owing to a limited problem description, existing classifications do not always account for the full spectrum of potential policy tools, thus impeding the design, monitoring, and evaluation of anti-corruption interventions. By reviewing the main features of more than 30 international initiatives targeting administrative corruption, this paper aims at identifying the core elements for a comprehensive and actionable typology of anti-corruption policies. A content analysis of the existing international efforts highlights the importance of considering three main groups of variables for classifying anti-corruption initiatives: the type of gain involved in the corrupt conduct, the mechanism of intervention exploited by the policy, and the type of policy tool. The typology provides an interdisciplinary perspective on existing anti-corruption efforts, confronting well-known criminological distinctions with a detailed classification of policy instruments. The study also identifies the main features and limits of existing anti-corruption classifications and efforts, such as the predominance of the economic paradigm and the focus on the characteristics of developing countries for problematizing corruption.
... Intermediaries offer insurance against opportunism, detection and conviction. Corrupt transactions are inherently unstable because they are not legally enforceable and partners may fail to deliver on their promises (Lambsdorff 2009). Intermediaries may have repeated contact with public servants, providing a deterrent against opportunism (Hasker and Okten 2008; Lambert-Mogiliansky et al. 2007). ...
... It induces firms to invest in potentially useless compliance systems rather than eliminating actual misconduct. Firms would be primarily interested in evidence on compliance rather than effective systems (Krawiec 2005; Lambsdorff 2009). Firms can do lots in avoiding the bribery of their agents, but most of what they do is not verifiable by third parties. ...
Article
Full-text available
Attempts to deter corruption have little recognized the operation of intermediaries. This study takes a New Institutional Economic-perspective, supported by a variety of case studies, to identify firms’ choices of when to engage corrupt intermediaries (buy) and how to approach reform. It argues that firms should be held unbendingly liable for the operation of their intermediaries. Reform may also focus on certifying “good” intermediaries and holding the certifier liable for the performance of its agents. Prohibiting intermediaries is not advisable, as intermediation can be either arranged in-house (make) or mixed with legal services. Registration and auditing of intermediaries provides a more promising avenue for reform. Legislators should balance the additional regulatory burden by granting a wage premium to registered intermediaries and denying legal recourse to unregistered competitors. KeywordsTrust–Opportunism–Enforcement–Liability–Regulation–Vertical integration
... Based on two influential studies, anticorruption can be classified along two axes, top-down/bottom-up (Lambsdorff 2008) and internal/external policies (Brunetti and Weder 2003). Table 3 shows the intersection of these two dimensions and provides the typical policies within each category. ...
Article
Full-text available
Despite significant investment in anticorruption instruments in the past decades, confusion about their effectiveness remains. While a growing body of scholarship claims that anticorruption reforms have generally failed, other scholars have shown that particular anticorruption tools may actually work. A likely explanation for these puzzling outcomes is that public administration research holds a mistaken view of corruption, and improperly selected anticorruption strategies often target the wrong type of corruption. To overcome this problem, this article proposes a four‐cell typology of corruption, reflecting two critical dimensions along which most corrupt behaviors occur: the resource transfer and the primary beneficiary. Synthesizing recent research developments, this article introduces a new conceptualization of corruption that integrates perspectives from several disciplines. It also offers a series of propositions concerning how each corruption type could be fought. The article concludes with implications for research and practice.
... The OECD (2009) referred to such measures as an integrity infrastructure, as they aim at building organizational integrity. Such internal anticorruption measures can be rules based or values based, and can build integrity from top-down or bottom-up; typically we find a mixture of these approaches (see, e.g., Lange, 2008, or Lambsdorff, 2009). Standard measures include internal risk analysis, trainings, code of ethics, job rotation, internal whistleblower procedures, random in-depth control, and so on. ...
Article
Corruption is at the core of weak governance. In the education sector, corruption is a threat to the quality of and access to education. Although the diagnosis is straightforward, effective reforms are more difficult to implement. The principles of good governance (transparency, participation, accountability, and integrity) provide us guidance, but innovative ways need to be found to fill these principles with life and create dynamics of change. We present a simple, efficient experience of introducing transparency and fostering participation and therefore accountability at the school level in Honduras. The transparency bulletin boards (murales de transparencia) are a homegrown response to the call for improving governance in a challenging environment.
... Corporations, for instance, have been busy in designing compliance systems. But these systems can also function as a moral license (Lambsdorff, 2009). They allow managers to express outrage at the designing stage so as to be more tolerant when bribery is thought to be unavoidable. ...
Article
Full-text available
This chapter argues that reciprocity provides a key to understanding corrupt behavior and its limitations. It allows for an understanding why agents not only are guided by explicit incentives but also serve those to whom they owe gratitude. It allows to observe how citizens disregard their narrow-minded interests and engage in altruistic punishment, potentially exercising negative reciprocity toward a corrupt leadership. It shows how reciprocity is at the center of criminal networks and how reform sometimes enhances rather than inhibits this dismal form of reciprocity. It finally reveals how humans are at risk of reciprocating toward their own self-image, which may inhibit them from impartially assessing their misdeeds. A thorough understanding of the power of reciprocity can inspire novel avenues for reform, some of which are presented here.
... The frequency of bribery can be reduced by rendering reciprocity uncertain, by undermining the stability of corrupt transactions. I labeled this method for anticorruption " the principle of the invisible foot " (Lambsdorff 2007Lambsdorff , 2009). The wording is chosen in line with the well-known economic principle of the invisible hand. ...
Article
Full-text available
Corrupt exchanges are often brokered by a third party, but this phenomenon has not been satisfactorily explored by researchers of corruption. Literature on brokerage in general provides interesting models but they have not previously been applied to corrupt exchanges. Based on in-depth qualitative interviews with respondents who participated in actual corrupt transactions, this paper identifies several distinct brokerage types in low-level corruption in contemporary Hungary. The paper also provides explanation of variation in corruption brokerage in terms of actors' group affiliations, forms of the corrupt exchanges, brokerage mechanisms, as well as neutrality, benefit and motivation, risk distribution, and stability of the brokerage structure. Finally, we discuss some policy implications of corruption brokerage.
Article
Full-text available
This article develops a simple framework to analyse the negotiation over bribe and tax payments during the tax collection process. We show that the larger the bribe a firm offers to a tax collector, the larger the tax rebate it gets. More particularly, we show that the negotiation over bribe and tax payments hinges on four other factors: firms’ official liabilities, detection, firms’ negotiation power and red tape costs imposed on firms. Some of the predictions from the theoretical model are tested using firm-level data from Uganda. We find that bribe and tax payments are inversely related, thereby supporting the hypothesis of a negotiation taking place between firms and tax collectors. In particular, a 1% point increase in average bribe payments per employee is associated with a 7% point reduction in average amount of tax payments per employee. Results are robust to various instruments dealing with the endogenous relationship between bribes and taxes.
Article
We review the existing laboratory experimental studies on corruption that have generated results with clear policy implications. We present and discuss experimental findings on the role that both monetary incentives and nonmonetary motivations may play in corruption decision-making, and, hence, in the fight against corruption.
Article
Full-text available
Corruption is a complex and multifaceted phenomenon. The aim of this article is to open the “black box” of corrupt transactions using the framework of the New Institutional Economics. First, it examines “corrupt contracts”, the institutions that promote them, the mechanisms involved, the transaction costs and the problems faced by the actors. Then the stages of a typical corrupt agreement are described: initiation, execution and post-contractual phase. To combat corruption the understanding of how corrupt actors think and how corrupt agreements work is necessary. Finally, the potential and limitations of traditional and the more recent anti-corruption measures are analyzed.
Book
Full-text available
• Why is ethics important to organizations? • What are the characteristics of an ethical organization? • How can we audit the ethics of an organization? • What measures and activities stimulate the ethical development of organizations? This book addresses these questions. It is easier to say that ethics is necessary than to tell how to organize ethics. This book provides a fundamental and coherent vision on how ethics can be organized in a focused way. This study examines the assumptions for organizing ethics, the pitfalls and phases of such a process, the parts of an ethics audit and the great variety of measures. The methods and insights illustrated in this book are based partially on practical research. One of these methods, the Ethics Thermometer, was based on more than 150 interviews at various organizations. The Ethics Thermometer has been applied in a great variety of profit and not-for-profit organizations in order to measure an organization's perceived context, conduct and consequences. This book will be important to scholars in the field of business ethics, as well as to managers and practitioners. For scholars, this study provides general knowledge about auditing and developing the ethics of an organization. A summary is given of the criteria by which the ethical content of an organization can be measured. For managers and practitioners, this study provides concrete suggestions for safeguarding and improving ethics within their organizations.
Article
Full-text available
Following the example of the many organizations in the United States which have a code of ethics, an increasing interest on the part of companies, trade organizations, (semi-)governmental organizations and professions in the Netherlands to develop codes of ethics can be witnessed. We have been able to escort a variety of organizations in this process. The process that organizations must go through in order to attain a code involves a variety of difficult decisions. In this article we will, based on our experiences, describe twelve dilemmas which will have to be ‘solved’ during the development of such a code. When one or more of these dilemmas is ignored or an ungrounded choice is made, the effectiveness of the code will be negatively affected. Furthermore, the twelve dilemmas could be used as twelve dimensions to exemplify organizational codes of ethics. In this article we will also discuss a method to organize ethics within the organization. This will serve as a guide as to how, with respect to the dilemmas described, adequate considerations can be made. The article will be concluded with a description of our experiences at the Dutch Schiphol Airport. This case demonstrates how the aforementioned reasoning can be applied in practice.
Article
Full-text available
Because corruption must be hidden from the public, transaction costs arising are of a different type than those of legal exchange. Moreover, because of the ever-present threat of mutual denunciation partners of a corrupt agreement are “locked-in” to each other even after an exchange has been finalized. This results in corrupt agreements being primarily arranged by middlemen or emerging as a by-product of legal exchange. It is concluded that corruption has little do with free competition. Fighting corruption should focus less on individual moral attitudes or penalties and more on methods to destabilize corrupt relationships.
Article
Full-text available
In this paper, we report on an experiment on corruption which investigates various determinants of corruptibility. We found that economics students are significantly more corrupt than others, which is due to self-selection rather than indoctrination. Moreover, our results vary with gender — male students of economics are most corrupt, male non-economists the least. Also, agents are no less corrupt if rewarded in addition to, and independently of a possible bribe. Our experiment isolates the influence of self-interest on cooperation from other influences such as risk attitude and expectations regarding the behavior of others.
Article
Full-text available
This paper investigates how information affect voting behaviour. There exist a large literature suggesting that uninformed voters can use informational shortcuts or cues to vote as if they were informed. This paper tests this hypothesis using unique Swedish individual survey data on the preferences of both politicians and voters. I find that uninformed voters are significantly worse than informed voters at voting for their most preferred politicians. This suggests that uninformed voters can not make up for their lack of information using shortcuts. Furthermore, the errors uninformed voters make do not cancel out in large elections. Estimates suggest that the ruling majorities would have switched in almost 5% of Swedish municipalities had all voters been fully informed. The effects are estimated with both parametric and nonparametric estimation techniques.
Article
Full-text available
Corrupt arrangements are characterized by a high risk of opportunism: double-dealing, whistle-blowing and extortion are significant uncertainties for participants in corrupt transactions. This paper demonstrates how legislators may use an asymmetric design of (criminal) sanctions and leniency programs to amplify these inherent risks, thereby destabilizing corrupt arrangements. It is also shown that asymmetric penalties and (ex-ante) leniency do not necessarily interfere with the goal of deterrence and may be a useful tool to disband the 'pact of silence' characteristic of corrupt arrangements. In particular, we show that bribe-takers should less be penalized for taking and more for reciprocating a bribe. Likewise, bribe-givers should be punished for giving bribes, but not for accepting the bribetakers' reciprocity.
Article
High levels of corruption limit investment and growth and lead to ineffective government. Developing countries and those making a transition from socialism are particularly at risk, but corruption is a worldwide phenomenon. Corruption creates inefficiencies and inequities, but reforms are possible to reduce the material benefits from payoffs. Corruption is not just an economic problem, however; it is also intertwined with politics. Reform may require changes in both constitutional structure and the underlying relationship of the market and the state. No single "blueprint" is possible, but the primary goal should be to reduce the gains from paying and receiving bribes, not simply to remove "bad apples."
Article
To enable a better understanding of the similarities, distinctions, frictions, and complementarities among corruption control types and to lay the groundwork for future study of their effectiveness in combination, I set forth a theoretical basis for considering a corruption control type in the context of other corruption control types. I draw from both the organizational control literature and the corruption control literature to conceptually derive an interrelated set of corruption control types, based on their important underlying dimensions and functions.
Chapter
The accelerating globalization of economic transactions provokes the impression that human values and patterns of behavior will sooner or later converge into one worldwide culture. This assumption seems to be especially true for the business world with its ‘culturally invariant rules of the market’. In fact, however, this convergence of the various business cultures of the world takes place only on their very surface and does not reach the different fundamental value systems. They are the result of a mostly unconscious and complex process, having developed over centuries, and thus resisting short-term change.
Article
We study the consequences of leniency—reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers—on sequential, bilateral, illegal transactions, such as corruption, manager–auditor collusion, or drug deals. It is known that leniency helps deterring illegal relationships sustained by repeated interaction. Here we find that—when not properly designed—leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.