Friday, 19 February 2016
INCENTIVES OF RETAIL CORRUPTION
In his study on Behavioural economics, Herbert Simon argues that firms and managers do not seek to maximize profits, but rather engage in behaviour that satisfies both parties. However, in the case of corruption the players are guided not with the objective of profit maximization but with the objective of fulfilling their desires and aspirations that emerge out of the incentives they have. The Prospect Theory posits that a person behaves not only to obtain maximum utility by optimising rationality but also takes into account their experiences and probabilities of acquiring gains in the future. In the case of corruption in India, these experiences are guided by the widely prevalent practice and history of corruption which makes visible the gains they could acquire in addition to their legal remittances. The choices made from these experiences largely reflect the cultural phenomena of corruption that is prevalent in the surroundings. Hence preferences are constructed from experiences. The strategy chosen by a person engaging in corruption is guided by his/her moral and the different strategies of people give different results for their engagement.
Corruption is a strategic situation where the officials and the citizens collaborate with each other to achieve their objectives. An agency relationship could be traced between the government, people and the officials with the officials being the agent acting on behalf of the government simultaneously.
The principal extends public utility services to the people in return of civil obedience expected from them. This mutual transaction occurs through the officials who act as the agent. Corruption surfaces when the agent acts in his self interest guided by certain incentives to accomplish his/her aspirations. This self interest generates objectives in the agent that conflicts the best interest of the principal and urges them to strategically perform an act to suit their interest. Hence they endorse a dominant strategy of demanding a bribe to fulfill their aspirations.
This dominant strategy culminates in the desired payoff when the moral of the citizen parallels that of the officer, as in the case of a person who wants an officer to perform a function improperly and the officer concedes in return for a bribe. This projects a case of Quid Pro Quo where the bribe is paid voluntarily and the players are engaged in a mutually beneficial transaction. The alternate scenario projects a bribe paid under duress where the various exogenous factors that coerce the citizen to pay a bribe.
The self interest that guides a dominant strategy of seeking a bribe looms from the various incentives that create desires for fulfillment. The categorization of incentives is as follows:
Monetary incentive emanates from the unequal distribution of resources and results in a desire to increase the purchasing power either due to absolute of relative poverty. Monetary incentive in the short run aims at fulfilling a monetary objective and makes visible ascension in the social hierarchy in the long run.
Personal incentive aims at fulfilling a personal desire out of which monetary benefits are not expected to be availed. Sexual incentives form a part of personal incentive where the impetus is to sexually demand more from the society from their position of power. Sexual incentives are driven by the political dynamics between two individuals due to patriarchal imposition.
Monetary and personal incentives feed into social incentives in the long run. An ascent along the social hierarchy is presumed to be possible by increasing the purchasing power. The stratification in the working class creates a psychological incentive to engage in corruption and improve their social standing.
The different categories of incentives are not exclusive to each other. Fulfilment of monetary objectives in the short run becomes indicative of a social uplifting in the long run and a higher social stature empowers the officials to monetarily demand more from the society. There is a significant overlap between them whereby they reinforce each other.
CATALYSTS OF RETAIL CORRUPTION
Incentives create the desire to engage in corruption for monetary, social or personal fulfilment. Catalysts drive the incentives. The distinction lies in what causes corruption and what lubricates corruption.
Lack of monitoring mechanism, punitive action and accountability are extrinsic motivators that catalyses corruption. The path dependence shaped out of hostile peer and hierarchal pressure escalates the vigour of this catalyst. It is the fear of social and monetary cost of change that the society would incur that daunts a deviation from path dependence. Transparency International’s Corruption Perception Index posits that a one-point increase of corruption on a scale from 10 to 0 lowers the productivity by 4% of the GDP and decreases net annual capital inflow by 0.5% of the GDP. With India’s score improving by a meagre 2 points over the last 2 years, India still remains to be one of the highly corrupt countries in the world, with corruption causing immense leakage in the economy. The capital that would be injected into the economy by a reduction of corruption in the long run will surmount this social and monetary cost.
Trimming the severity of this path dependence requires an operant conditioning that needs to be carried out at the advocacy platform through a method of learning that involves rewards and punishments. Although punitive action has been ruled out as being effective in tackling this supply side issue, increasing the rates of detection and social conditioning of the agent to be accountable to both the government and the people might be a fruitful reform.
Monopoly power exercised by the government in the provision of various services and prevailing human interface catalyses corruption by triggering the exploitative ability the power holds. This lack of alternative creates a positive reinforcement where a desired outcome obtained by paying a bribe recurs and results in learned helplessness. This results in an intrinsic motivation that guides people to trail the same path as a consequence of their previous experiences.
Issues of scarcity plague every developing country including India. In such a scenario when new sources of wealth and power becomes visible the aspirations and greed of the people increases and it feeds into their acquisitive instincts and extrinsically motivates them to engage in corruption.
Economic rent seeking activities such as corruption poses a heavy economic and social toll on the country. The misallocation of resources that occur through corruption affects the redistribution of wealth in the economy and deter sustained economic development. The cost incurred from corruption signifies the redistributive disparity that emerges from a lower marginal utility gained by an official compared to a higher utility that could have been gained by the poor.
The acceptance given to corruption is what needs to be broken. Breaking this compliance would involve expanding the boundaries of rational decision making through capacity building in both supply and demand side so that symmetry in information is maintained and a psychic cost accompanying corruption is developed.
Incentives to corruption cannot be deterred. Disincentives such as the introduction of technology in service provision and an enhanced monitoring mechanism should be evolved so as to subdue these incentives.
The only way to scale down corruption is to break the acceptance enjoyed by it; by pointing out to the younger generation a future with stable livelihoods even without engaging in corruption. With India still holding a low 76th rank out of 177 in “Corruption Perception Index” and with the incentives pushing forward to a more established culture of corruption, anticipating a sustained economic development in India is forlorn.
B.A. Economics, St. Xaviers, Mumbai