Abstract
As any other economic transaction, corruption too has demand and supply dimensions. The focus thus far has been on the demand side, viz., government trying to control its own officials. Dixit shifts the attention to the supply side, viz., firms. He proposes that business community itself could set a norm of ‘no bribes’ and enforce it through ostracism such as ‘not doing business with those firms who give bribes’. Dixit suggests that largest firms could potentially take the lead as they may be better able to withstand initial losses till the norm takes roots.
This is a slightly revised text of a lecture delivered on 6 February 2013 at the Indira Gandhi Institute of Development Research. An earlier version was presented at the Delhi Economic Conclave on 14 December 2012. I thank Lisa Bernstein, Kala Hoff, Raghuram Rajan, Dani Rodrik, and audience members at the lectures for their thoughtful comments, but retain sole responsibility for the arguments and views expressed here.
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Notes
- 1.
- 2.
The insidious and harmful pervasiveness of such harassment and extortion is brilliantly described by Boo (2012).
- 3.
See Ostrom et al. (2007) for a related argument in the context of environmental problems.
- 4.
Kaushik Basu’s idea, namely that suppliers of harassment bribes should be offered immunity from prosecution if they turn whistle-blowers, serves the purpose of facilitating the punishment of the officials who demand the bribes, and therefore is basically a demand-side solution. This idea proved very controversial; fortunately my argument is quite different so I don’t need to get into that controversy here.
- 5.
See Ostrom (1990), and her Nobel Prize Lecture, “Beyond Markets and States: Polycentric Governance of Complex Economic Systems,” for which both text and video are available at http://www.nobelprize.org/nobel_prizes/economics/laureates/2009/ostrom-lecture.html.
- 6.
- 7.
This is similar to the “honor code” at West Point and some US universities (including Princeton): the faculty do not monitor examination rooms; instead, students are supposed to report anyone they see violating the rules, and any failure to report is itself a violation of the honor code.
- 8.
A rigorous but technical proof goes as follows. In the many-player repeated game of the business community, each player in each deal must have enough surplus or profit to offset the benefit he could get by a one-time cheating. If A has cheated, and C offers to deal with him, A’s temptation to cheat C to take the one-time benefit is greater because he is already ostracized by the rest and therefore has less to fear about the future. Therefore C would have to offer A more surplus to stay honest than if he chose a partner who did not have a history of cheating. Therefore C would only lower his own payoff by violating the norm. This is what sustains ostracism as a Nash equilibrium. See Greif, op. cit., Proposition 3.2 on p. 77.
- 9.
Nobel Prize lecture cited above, p. 419.
- 10.
Kumar (2011).
- 11.
- 12.
In the jargon of information economics, they can use information that is merely observable, not verifiable, while law courts insist on verifiable information.
- 13.
- 14.
See Olson and Zeckhauser (1966).
- 15.
In economics jargon, we are not starting behind a Rawlsian veil of ignorance where no one knows which position they will occupy in the proposed arrangement.
- 16.
See my paper Dixit (2003) for a model of such a process.
- 17.
In this context “common knowledge” is a technical term; it means that everyone knows, everyone knows that everyone knows, and so on to infinity.
- 18.
Footnote 8 gives a more rigorous statement.
- 19.
Such complementarity between different functions of a relational governance institution is observed in other contexts also. For example, in Lisa Bernstein’s studies cited above, the business communities of diamond and cotton dealers also have social ties among their families, and threats of social ostracism strengthen the punishment of business ostracism in deterring opportunistic behavior in contracts. Associations like Rotary and Lions Clubs provide business networking and matching to their members, and a threat of cutting off access to these services can reinforce their role as private order institutions to ensure good behavior in contracts between members; see Xu (2006).
- 20.
My suggestion follows Shleifer and Vishny (1998).
- 21.
Descriptions can be found at http://asiafoundation.org/publications/pdf/842, http://cda.nevcounty.net/onestop/onestop.asp, and http://www.baltimorehousing.org/permit_procedure.
- 22.
The first amendment states: “Congress shall make no law … abridging … the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”.
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Dixit, A.K. (2016). Corruption: Supply-Side and Demand-Side Solutions. In: Dev, S., Babu, P. (eds) Development in India. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2541-6_4
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