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A Policy-Oriented Theory of Corruption Author(s): Tevfik F. Nas, Albert C. Price, Charles T.

Weber Source: The American Political Science Review, Vol. 80, No. 1 (Mar., 1986), pp. 107-119 Published by: American Political Science Association Stable URL: Accessed: 13/08/2010 07:14
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Universityof Michigan Flint

Perspectives from political science and economics are drawn on to suggest an integratedtheory of governmentalcorruption. The theory is orientedtowardpolicy choices, and corruptionis viewed as a productof individualand structuralvariablesthat interactto produce both positive and negative consequences. Individual-levelconsiderationssuch as greed and the likelihood of detection and constraints, prosecutionsuggestone set of policiesfor reducingcorruption.Bureaucratic citizenparticipation,and the congruenceof legal structuresand social demandsoffer a competingset of concernsthat must be dealt with in analyzing corruptpractices. We show that corruption, as a process, influences the optimal level of social welfare. Alternative conceptions are examined, and a model is developed to evaluate policy choices relatedto corruptionfrom the perspectiveof welfare optimization.Applied to the analysis of corruption,the model integratesgeneralequilibriumtheory, deterrence theory, and structuralconditions.Finally, policy implicationsare considered.

Despite its frequent occurrence, governmental corruption has undergonesurprisinglylittle systematic investigation. The theoretical literaturehas adoptedeitherbroad classifications of administrative corruption defini1970)or categorical (Heidenheimer, tions of a wide range of corruptactivities (Petersand Welch, 1978), and has relied largely on descriptiveanalysisin examining the causes and effects of corrupt behavior.As Werner(1983,p. 152) notes, corruption "If the field of administrative is to become more theoreticaland less descriptive,it must develop a framework

and methodology that will permit comparative analysis."There remainsa need for an internally consistent theoretical model and an analyticaldefinitionwhich would lead to important policy considerations. This article examines corruptionfrom the combined perspectives of political scienceand economicsto develop a theoretical frameworkand methodology for policy analysis. Political science tends toward anecdotal accounts of individual cases of corruption that are useful in defining the concept, but provide little systematic analysis. Economics views


American Political Science Review Vol. 80

that provide direct or indirectbenefit to government officials. In a similar vein, Petersand Welch (1978, p. 76) develop a four-part classification (official involvement, actual favor granted, payoff to official, and the donor of the payoff) in a survey of state senatorsto rankparticular acts as more corruptor less corrupt. These classificationshave merit in the of description a specificcorruptevent, yet they lack the generalityessential for an analytically useful definition of corruption. To fill this gap, our analysisemploys a definition that incorporatesalternative that have been developed interpretations We in the literature. definea corruptact as any illegitimateuse of public power or authorityfor privatebenefit. Such a concept subsumesall of the previous definitions and permits the analysis of a wide range of corrupt practices. It should be clear that this definition excludes "pork and barrelling" otherformsof economically inefficient but politically attractive distributivepolicies, since they use legitimate (legislative bargaining) means to influence governmentalbehavior (Weingast, Shepsle,and Johnson,1981). on A secondproblemwith the literature corruptionis that it is largely descriptive and anecdotal. Sinclair'sportrayalof the meat packing industry and Gardiner's assessment of organized crime in an Problems of Definition American city are representativeof the One of the difficultieswith this topic problem(Gardiner,1970; Sinclair,1908). stems from the lack of a widely accepted While both works provide tremendous definition of corruption. Heidenheimer insight into specific cases of corruption, they provide little coherentor systematic (1970, pp. 3-9) describesthree types of theory concerningthe topic. publicofficecorruptbehaviordefinitions: What is lacking in most of the pubcentered, market-centered, and public interest-centered. Public office-centered lished materialis a systematicmechanism for linking the causes of corruptionwith definitionsrevolve aroundthe violationof trust placed in the official. its consequencesto generatepublicpolicy the public of corruptionrefers to the alternatives.Regardless the debateover Market-centered situationin which the officialsees the posi- definitionand outrageover specificexamtion as an authorityto maximizepersonal ples of corrupt behavior, the question remains, "What should our society do gain by dispensing public benefits. A definitionof cor- about corruption" To attemptan answer public interest-centered ruptionstressesthe violation of the com- it is necessaryfirst to examine the causes mon interestin favor of special interests and consequencesof corruption. corruption within a model of rational individualchoice, with little concentration on the overall impact on society. While provideinsightinto differboth disciplines ing aspects of corruption, neither alone producesa sufficientlysatisfyingexplanaof tion of the pervasiveness corruptionin society. In this study, by incorporating both perspectiveswe develop a coherent theoretical framework from which the causes and societal consequencesof corruptioncan be assessed. The first section examines previous of interpretations corruption,develops a to definitionappropriate an interdisciplinary approach,andprovidesa dichotomous conceptionof the effects of corruptionas being either beneficialor detrimental.In the secondsectionthe effectsof corruption on social welfareare placedin the context of a general equilibriummodel. This is followed by a description of a formal model that integratesgeneralequilibrium theory, deterrencetheory, and structural variables relevant to corruption. Public policy implications derived from this modelare then explored.The majorimplication of examiningthe problemin these termsis thatsocietymay need to altersubstantially its approach to dealing with corruption.

1986 Policy-OrientedTheory of Corruption

theory." The idea is that bureaucratic inertiacan cause people to attemptto cirThe causes of corruptioncan be viewed cumventofficialchannelsthroughbribery from two distinct perspectives; one or other illegitimatemeans to achieve a involves individual characteristicswhile desiredresult (Johnson,1982, pp. 22-24). influ- Rose-Ackerman (1978, pp. 85-186) the other concentrateson structural ences. The individual-level explanation devotes nearly half of her book to examtends to view the corruptact as the result ining how various bureaucraticarrangeof greed or the inability to withstand ments influencethe level of corruption. The quality of political participationis temptations on the part of weak or insufficientlyethical officials. Greed, or also describedas a deterrentof corrupdesire for gain, is indeed a strong tion. Nonpartisan ballots and at-large motivator of human behavior, as the municipal elections were aimed at literaturesuggests. The Knapp Commis- improving the quality of participation and breakingelectoral support for ward sion's study of police wrongdoingin New York City classified corrupt officers as politicians and political machines. In either "grass eaters" or "meat eaters" recentyears, reelectionof corruptofficials dependingon the extent of theirpersonal againraisesquestionsabout the qualityof greed (Knapp Commission, 1973). Gar- democratic participation (Rundquist, diner and Olson (1974, pp. 274-81) Strom, and Peters, 1977, pp. 954-63). If discuss the inability to withstandtempta- officials are not closely scrutinized, it tion and problems of individual value would seem more likely that they would systems as two of the major explanations feel unconstrainedin seeking their own of corruption.Rogow and Lasswell(1963, benefit over that of the public. A third structuralview of corruption pp. 45-54) classify corrupt machine bosses as having either "gain"or "game" involves problems caused by the lack of orientationstoward politics. While these congruencebetween the legal system and individualexplanationsprovide valuable social demand, and can be seen in the insight into why some officials can cases of prostitution, gambling, and become corrupt, they are not satisfying drugs. The law in the vast majorityof the explanationsfor the extent of corruption United States prohibits prostitution, drugs, in our society, because they lack general gambling,and certainrecreational yet at the same time thereis a substantial applicability. demandfor such servicesand products.If In order to provide a broaderlevel of the legal system does not adequately analysis we explore three categories of explanations:(1) bureau- respondto demandsfrom the public or an structural-level intensely interested subgroup, then the cratic or organizational(6), (2) quality of citizen involvement (y), and (3) congru- likelihood of corruption increases. ence of the legal system to social demands Officialsare susceptibleto beingbribedto (7r).The first two are derived from the overlook violations that are desiredby a segment of the public. In this situation, existing literature while the third is the political system, or more correctly, for the first time. describedin this paper The organizational or bureaucratic the lack of congruence between social demandsand politicaloutcomes, can be a approachto corruptionhas a numberof variations, but the essential theme is the cause of corruption. A somewhat different problem coninability to accomplish public purposes due to impedimentscreated by bureau- cerningthe legal systemoccursif property cratic organization. One variant of this rightsare unclear,as it is possiblefor peotheme has been labeled the "bottleneck ple to attempt to influence an official Causes of Corruption

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illegitimatelyin a causein which they feel they are protecting their property. An example of this type of situationis in the illegal pollution of a waterwayby a company. Ownership of a river may be unclear, while the company is clearly owned by the shareholders.The pressure would be on the company to dispose of hazardous waste as inexpensively as possible. An environmental official is requiredto safeguardthe public'sinterest in the river, yet the interestis not clearly defined. It is easy to envision a situation where an official does not seek aggressive enforcement in exchange for private benefit from the company. If property rights concerning the river or other natural resources were more clearly defined it would be expected that the owners of the propertywould vigorously protest its violation and requireenforcement of the laws. Consequencesof Corruption In additionto the causesof corruption, an integrated public policy approach requires an examination of the consequences of such behavior, so that scarce governmentalresourcescan be efficiently utilized. The bulk of the corruptionliterature has describedthe consequencesas being routinely negative. A 1966 article, "Corruption,The Shame of the States" (Wilson, 1966), is illustrativeof the traditional self-righteous approach to the topic. There are a few notable exceptions to this approach,such as Merton's(1972) analysis of the social service functions providedto otherwiseignoredimmigrants by apparentlycorruptpoliticalmachines. Similarly, Nye (1967) attempts to evaluate the possiblepositive consequencesof corruption for third world economic development. Both studies attempted to evaluate the consequencesof corruption rather than assuming the consequences were negative. Debateover the effectsof corruptionon society has lately been revived. A recent

study suggeststhat corruptpracticeshave a "spillover" effect on the remainderof takesa numberof society. The "spillover" forms that lead to a lessened respect for the governmenton the part of the public. This effect is negative and is the putative consequenceof administrative corruption (Werner,1983, pp. 149-50). To reducethe confusionover the effects of corruptionupon the overall welfareof a society it is necessary to evaluate systematically the negative aspects of a corrupt activity in comparisonwith the in advantagesderivedby the participants the illegitimate exchange. With this approachit is possibleto interpret corruption as having eithera beneficialor detrimental net effect on society. BeneficialCorruption The concept of beneficialcorruptionis counter-intuitiveand thus requireselaboration. When the productionof desired goods and services in society is inhibited by structuralinefficiencies(bureaucratic, legal, and political), corruption could serve as a means of attainingthe desired outcome. The individualsparticipating in the illegitimate activity directly benefit from the transaction,while simultaneously raising social welfare by creating opportunitiesfor production that would otherwisebe restricted. An examplewill be useful at this point. Prostitution is nearly universal, yet the activity is illegal in most locations. The demandfor prostitutionis at least extensive enoughto raiselargesums of money, which in turn generateslucrative bribes for vice control officers. The causes of prostitution are not clearly understood but are related to a number of societal conditions concerning sexual activity among consenting adults. Given the sexual revolutionof the 1960s and 1970s, it may not be unreasonable suggestthat to the laws prohibitingthe performanceof sexual activities for money lag significantly behindthe actuallevel of tolerance

1986 Policy-OrientedTheory of Corruption

in society. Assumingthis to be the case, it is easy to see how a police officer could overlook his or her duty to enforce an outdatedlaw becauseof a bribeor payoff. The primary benefits in this example are derivedby the customerof the service, the prostitute, the procurer, and the official who accepts the bribe. These benefits can be grouped into two categories: (1) the direct gain of the participants in the illegitimatetransaction,and (2) the reductionof the likelihoodof additionalnegativesanctionsupon individuals performinga widely demandedservice. of Possible externalities corruptionand equitable distributionof the benefits in society must also be taken into account. The negative externalitiesmay produce with the legal long term disenchantment systemand therebyharmsociety. Because these negative effects are distributedin a diffuse way with little direct damage to any particularindividual,it is difficultto evaluate the extent of the harm. The distribution of direct benefits in society is also an importantdeterminant of the desirabilityof a corrupt transaction. If the outcome of the transaction differentiallybenefits an income group not requiring preferential treatment equity standaccordingto the distributive ards of the society, then the social desirability of the corruption would be lowered. In the case of prostitutionit is difficult to determine the distributional impact with any specificity. One could argue, however, that the distribution resultingfrom corruptionmay be favorable because of the dual benefit that a prostitutecan deriveby being able to earn Using a income and avoid imprisonment. Rawlsian perspective, this distribution can be justified if it is assumed that the prostituteis among the least advantaged segmentof society (Rawls,1971).The distributionalequity questionmustbe examined individually for each situation in which beneficialcorruptionexists. The idea of beneficialcorruptiondoes

not imply that these activities should be consideredlegitimate,but ratherthat they provide a net increase in social welfare. What is implied is that there must be a seriousstructural flaw for any corruptact to lead to increasedwelfare.This is where the policy alternatives that will be describedlater come into play. DetrimentalCorruption The concept of detrimentalcorruption is easier to reconcilewith the bulk of the literature on the subject; however, our interpretation requires further elucidation. A particularcorruptactivity will be considereddetrimentalin this analysis if the net impact on society is negative. An example,concerning briberyof a mine the safety inspector, will help to illuminate our conceptionof detrimental corruption. A mine safety inspectoris requiredto certify that conditions in a particular mining operation are safe. The cost of actually maintaining a safe mining environmentis extensive for the mineral extractioncompany. The companymight cut costs on its safety equipmentby bribing a safety inspectorto incorrectly certify that the mine is safe when in fact it is dangerous.The companyand the corrupt officialwould profitfrom the transaction, but the risk of disaster for the miners would be enormous.Evenif the profitable transaction betweenthe companyand the official were to last many years before a disasteractuallydid occur, the loss of life resultingfroma minecave-inor explosion would exceed any monetary considerations. The situationwould be categorized as detrimentalin our analysis, regardless of the income transferamong the parties, because of the health risk caused by the corrupttransaction. The conceptionof beneficialand detrimental corruption described above is useful in exploringthe nature of corruption intuitively, but it is hardly systematic. To develop a systematic mech-

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anismfor analyzingthe impactof corruption on social welfareand to derivepublic policy alternatives,this conceptionneeds to be articulatedwithin a generalequilibrium framework, since such alternatives involve society'suse of resources. Figure1. Corruptionand Social Welfare Model in a GeneralEquilibrium
Utilityof Income SegmentA

Corruptionand Social Welfare

Consider a general equilibriummodel that includesa social welfarefunctionand the Pareto optimal conditions for the economy as a whole. In addition to the efficiency conditions most commonly stated for social welfare maximization,it will be assumedthat society'sproduction is organized in accordance with Pareto optimality;that propertyrights are sufficiently definedto assureevery memberof society the desired output mix; and that among production, the interrelationship consumption, and distribution is legitimized within a legal structuresynchronized to the Paretooptimumsetting.1The general feature of this model is that it extends the Pareto optimum and welfare maximum conditions to the organizational, political, and legal structuresof a society. The public sector is assumed to act in direct response to society's preferences, and its involvementin the private market is limited to the conventional allocation, stabilization,and distribution functions that are largely exercised to maintainthe Paretowelfare maximum.2 Under these conditions, any alteration in the public to privateoutputmix will be assumed legitimateonly if it is along the lines of the Paretowelfaremaximumand is authorized by the prevailing legal system. In other words, changinga position on the Paretowelfarefrontierwill be a legitimate rearrangementif it results from a desiredalterationin social preferences justifiableby the legal structureof the society; otherwise it will be illegitimate, which may dictateadditionaluse of societal resourcesfor its internalization. in This is demonstrated Figure1, where

F PI w2




Utility of

UB Key to Figure 1:

IncomeUB SegmentB

is a welfare frontier representing a possible distribution of real income (utility) between two income segments A and B. represents the same distribution at a UAUB higher level of societal income. is the Bergson-Samuelson social welWO fare function. W1 and W2 the higher numbered curves represent society's distributional judgment at higher levels of social welfare. are allocations which simultaneously P and P' satisfy Pareto optimum and social welfare criteria. imply possible allocations and disF and Q tributions which may result from beneficial corruption when society is initially at point P. Corruption will be detrimental if society can freely move to P' but is forced to move to F and Q or remain at P. UAUB

UAUBdepicts the welfare frontierand W the Bergson-Samuelson social welfare function.3 A line from the origin through point P representsthe public to private outputratiomost desirabledistributionally. The allocationwhich correspondsto P simultaneouslysatisfies Pareto optimum and welfare criteria.Any deviation from this point would be a distributional (allocationalif the welfarefrontiermoves only if it is desired outward)improvement by the society and accompaniedby a suf-

1986 Policy-OrientedTheory of Corruption

and ficientalterationin the organizational legal structure.Thus, as shown in Figure 1, a move from P to P' would be an acceptableand legal one. Underthe given assumptions, any other position off the frontier,say point Q, would be inefficient and illegal, leading to welfare losses shown as the differencebetween W1and W2on the diagram. To add realism to the model, let us assume that society encountersobstacles in adjusting its organizationaland legal changesin the structuresto the preferred outputmix.4The publicsectorlags behind the privatesector in adaptingto new production technologies, and at the same time the legal structure fails to adjust quickly to the changing conventions, norms, and expectationsof society.5 Given these changes, consider point P in Figure1 and the following cases: dictate an out1. Society'spreferences put mix other than P, yet the legal structure does not authorizesuch alteration; 2. Society is at point P, and, although the legal structureis permissive,thereare obstacleswhich may delay a bureaucratic desired move towards another point on or either UAUB U'AU; 3. Society is at point P, and, despite inefficiencies in the organizational and legal structures,there is no tendencyfor society to look for another restingpoint on eitherfrontier;and 4. Society can freely move from P to any otherpoint on eitherfrontierwithout and being affectedby organizational legal inefficiencies. In all four cases initiatingforceswill be presentto move society to anotherresting point, eitherthroughlegitimateor illegitimate means. The forceswhich use illegitimate means will become the sources of corrupt practices CP. This means that transformationof societal resourcesand alterationsin the public to privateoutput ratio will result from corrupt practices only if they are caused by an unauthorized collaborated effort between public

and privatesector producers.These practices correspondto the interpretationof corruption which is used in the current literature, and incorporate activities associated with the office-centered, market-centered, and public-centered types of violations reviewedearlier. Note that the illegitimatemeansin case 1 and case 2 resultin increasedwelfarein the Pareto sense only if the social change is on the welfarefrontierand stays along the lines of the social welfare function. This would correspondto the notion of beneficialcorruptionpresentedabove. In cases 3 and 4, illegitimatemeanswill lead to welfare losses, which we define as detrimentalcorruption. It is likely that both welfareeffectswill be presentin any corrupt practice. The determinationof whether a particularcorrupt transaction is beneficialor detrimentalwill be based upon the net impacton social welfare. Beneficial corruption is viewed as a "good"in this model because of its positive net impact on society's welfare. Corruptpracticesshift UAUBoutward as indicatedin cases 1 and 2, and restorea public to private output ratio at a higher welfarelevel shown by the tangencypoint P'. This point will be maintainedonly if society incursno additionalcosts related to corrupt practices. When such costs exist, society will restorethe equilibrium at a welfarelevel lower than P' but higher than initial point P, primarily because of the costs associated with the corrupt actionsand the spillovereffectson the rest of the economy. Consider, for example, the welfarelosses WL(SC) that may result becauseof the externaldiseconomies(SC) associated with beneficial corruption, such as the negative implicationsfollowing from the violations of the rules and norms of a society. Also, assume that society incurs additional losses WL(R1), due to resourceuse in corruptionprevention, and WL(R2),due to resourceuse in the corrupt sector to conceal corruption if and minimizepunishment apprehended.

American Political Science Review Vol. 80

When these costs are significant the welfare frontiermoves inward, restoring a public to privateoutputratio at a lower level of welfare. For corruption to be beneficial under these conditions the welfaregains from corruption(WG)must exceed the welfare losses (WL). This means

acP or more specifically,

OWG WL(SC) + WL(Rl) + aWL(R2)

of both individual characteristics and social influences, and its welfare impact will incorporateboth costs and benefits that may warrant different emphasis in terms of policy preferences.The determinantsof corruption,therefore,must be analyzed from the perspectivesof individuals and of society. The analytic frameworkproposed below employs the rationalindividualchoice model that has been widely used in the crime literature, and incorporatesthree additional structural variables to account for societal influences.






Model for Policy Analysis

Consider the social loss minimization function, (3) WL= WL(S,R,f',CP), which has the same properties as the model used in the crime Becker-Ehrlich literature.8 is the net social cost which S results from corrupt practices; R is the direct cost of corruption;f' is the social loss per violator convicted;and CP is the numberof corruptpractices. The equationsof the model are: S = SC(CP) - SB(CP) SB'>O SC'>O SB"< O SC"> O R2) CP),R = (R1, R = R(p, R' > 0 f'=kf, k>0

Note that alterationof publicto private output ratios could lead to welfaregains, but at the same time change the distributive equity. As shown in Figure1, when the initiating forces in cases 1 and 2 restore a Pareto-efficient allocation at point F, income distributionimproves in favor of incomegroupA, but at the same time reduces social welfare to the level representedby W1. From an economist's perspective such changes in resource allocationare still beneficialas long as the new equilibrium F represents higher welfare than the initial allocation p.6 It shouldbe emphasizedthat the magnitude of welfare loss due to distributional effects will depend on society's notion of fairness. From a utilitarian distributive equity approach, corruption will be beneficial as long as it adds to welfare despite its adverseimpact on income diswill tribution.An egalitarian toleratesuch corruption if it improves equality of income, and so will a Rawlsian,as long as the utility of the least advantagedgroup in society is maximized. Under each of these equity assumptions, the rule for beneficialcorruptionis still valid: corruption is beneficialas long as welfare gains exceed welfarelosses; otherwiseit will be


(5) (6) (7) ?


< 0 8f < 'd(Y/Y)>

> O0,






> 0-<O.



In either case, corruptionis a product


In equation(4) net social cost (S) is stated as the differencebetweensocial costs (SC)

1986 Policy-Oriented Theory of Corruption

and socialbenefits(SB).Socialcosts result from the externaldiseconomiesof corruption; they include economic costs and social damages imposed on third nonconsenting parties, such as the negative implications of violating the rules and norms of society. Social benefits include welfaregains which resultfrom cases 1 or 2, describedearlier, and account for the personal gains of the parties who are engagedin corruptpractices.Both SC and SB are relatedto the level of corruptpractices (CP) and tend to increase as CP increases.SinceSC" > 0 and SB"< 0, it is assumedthat social costs and benefits are subjectto increasingand diminishing returns. In equation (5) the direct costs of corruption (R), are expectedto increaseas a result of increasesin CP and in the probability of apprehendingand convicting the violators (p). Additional resources will (RD) be used in discoveringviolations and convictingviolators, and at the same time resources (R2) will be used by the violators to conceal their corrupt practices and to minimizepunishmentif they are convicted. Equation (6) defines the social cost of punishment(f'). The size of punishment (f), such as the length of is imprisonment, translatedinto its social cost equivalent f' by a coefficient k indicating the form of punishment imposed on the violator. Equation(7) relatesthe level of corruption to p, to f, to the proportionof illegitimate income Yito the level of legitimate income Y1, and to three structuralvariables:6 indicatingthe size of bureaucracy; Xrthe degreeof ambiguityof the property rights legislation; and -y the degree of in politicalparticipation the productionof public goods. The deterrencevariables, p and f, and the coefficient k are borrowed from Becker's crime model to explain some aspects of corruptionthat would be dealt with in a normal criminal activity. As specifiedin the model, varyingp, f, and k

is expected to alter the nature of individual optimization.For example, public officialswith relativelylow pay are likely to react to these variables, and when society raises the values of these variables, they are expected to temper and systematizetheirpracticesof corruption. The structural variables account for society's reaction to corruption under of varying arrangements organizational, The organilegal, and politicalstructures. zational variable 6 is expected to vary with CP in the same direction. Increased bureaucratic inefficiency inflicts additional time and resource costs on the private sector, and this, in turn, presses potential violators to economizeby initiating some form of corruption, such as bribery, to obtain expedited processing. Likewise, ir, indicating the degree of vagueness and impotence of property rights legislation, is expected to vary directly with CP. An example would be the differencein interpretationof property rights concerningthe ownership of groundwater and air resources. Public officials are more likely to participatein corrupt transactionsinvolving air pollution, which is subject to vague property rights, than in the case of contamination of groundwater,where ownershipexpectations are vociferouslyexercised. The third variable, 'y, is the degree of in politicalparticipation the productionof public goods. It indicatesthe probability of detectingviolations and varies inversely with CP. Low political participation, rationalignorance,or absenceof political pressuregroups is expectedto reducethe probability of detecting corruption. Nepotism and patronage as methods of awarding governmental jobs and contracts are practices that are difficult to maintain under intense public scrutiny. in Politicalparticipation electionsand the degreeof attentionthat society devotes to processeswill politicaland administrative vary for many reasons. Wars or other major upheavalstend to divert the atten-

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tion of society, and the expansion of economic activity that results increases the opportunityto engagein corruptacts. Variation in the business cycle itself would be expected to affect the political participation variable as well. Many activities that might be condoned or ignored during good times become the focus of investigationswhen conditions worsen and budgetsbecome tighter.9 Note that thesevariablescorrespondto the structural variables and initiating the forces that determined level of corruption and the resultingchangesin society's welfare as described in Figure 1. The policy implicationsthat follow from the deterrent variables, however, are more restrictivethan in the case of crime control.10As emphasizedearlier, corruption

of PolicyImplications the Model

The modelsuggeststhreedistinctpolicy approaches that a society can employ corruption.Maintenanceof the regarding status quo is the first policy option, with no additional resources employed to detect or punish violators. The second approach stresses individual-leveldeteras rentconsiderations a meansof reducing corruption, with additional resources devoted to increasingthe probability of detection and punishment of parties The engagedin corrupttransactions. third alternativeconcentrateson the alteration of the structuralconditions relevant to corruption. Additional resources (*hich will be definedas R3)would be utilizedto clarify property rights, make legislation more congruent with social demands, reduce bureaucratic inefficiency, and increase political participation.In order to maximizesocial welfare it is necessary to tailor the public policy responseto the type of corruptactivity in question. Recall that corruption was dichotomized as being either beneficialor detrimental, according to its net impact on social welfare. The three public policy options must now be evaluated to determine which choice will maximize social welfare for a given type of corruption. The first option, maintenance of the status quo, can be employed for either type of corruption if certain conditions are present. To justify choosing this option, additionalcosts requiredfor any change in policy must exceed the benefits derived from reducingcorruptpractices. This means that the costs of the corrupt activity must be less for society than the costs associated with any method of reducing the illegitimate practice. Another condition that could justify the statusquo would be.the society'sapparent contentmentwith the currentlevel of corruptpractices,so that therewas no incentive to seek another position. Society in this case can simply ignore the problem.

results from a collaborative effort publicofficialsand privateparbetween impactof corruption ties. The economic relativeto crimeas definedin criminal and bad," the lawis in theformof "public is extentof its adversity likelyto depend of on the degreeof resistance subjected are variables likely society.Thedeterrent is to be less effective,sincecorruption a effort,and if cormuchmorecalculated
ruptionis uncovered,often the liabilityis joint, a factor which may significantly

of reducethe ex ante effectiveness the variables. deterrent Thus, the individualrationalchoice modelmay be usefulfor the analysisof corruptionthat is clearly detrimental. in results both whencorruption However, socialcostsand socialbenefits,the addito variables pertaining tion of structural level the resistance of societyis approprifunctionintroduced ate. In the corruption

above, both public officials and the privatepartiesinvolvedare expectedto reactto 6, vr,and y. Justas p andf are in variables theutilityfunctions deterrent
of violators, 5, vr,and y will be additional

significantly incentivesor disincentives,

determiningthe level and type of corruption in a society.

1986 Policy-OrientedTheory of Corruption

This option represents an equilibrium position in which the marginal costs of corruptionare roughly equivalentto the marginal social benefits attainable from corruptionreduction. The second policy alternativeinvolves increasingp and f. This policy option is corruption, desirableonly for detrimental and is justifiedby the same logic as the deterrent model in the standard crime control literature. Since the net social impact of detrimentalcorruptionis negative, additional resource allocation to improve deterrent considerations is appropriate until the point at which WL(S,R,f) is minimized." Notice that increasingthe deterrentconsiderationsis inappropriatefor beneficial corruption, because the net social impact of the activity is positive to begin with, and any additionalRX and R2would detractfrom the marginalsocial welfare. The third policy option requiressome combination of the following measures: improving bureaucratic effectiveness, legal changesclarifyingpropertyrightsor increasingthe congruencebetween social demands and political outcomes, and efforts aimed at increasingpolitical participation. These structural alterations will involve resource utilization R3. To justify this option resource costs associatedwith corruptpractices(SC,R,f')must exceedR3. Symbolically,this means of efficienciesin the structures society, the appropriate policy response will be to concentrateadditionalresourceson making improvementsin social structures.If instead individual deterrent considerations are enlarged to reduce beneficial corruption, then society will experience welfarelosses due to increasedsocial costs relatedto the additionalR1,R2,and f'.


This researchhas exploredthe topic of corruption from the combined perspectives of economicsand politicalscienceto develop an integratedapproach for the development of coherent public policy. To that end it was necessary to link the and concauses (individualor structural) sequences (positive or negative) of corruption, and examinethe situationin the context of social welfare effects. One of the theoretical improvements developed in this work is that corruption should not be thought of as a single phenomenon,but as a dichotomycharacterized by the net impact of the illegitimate activity on social welfare. If the net impact is positive, corruption is categorized as beneficial; if it is negative, corruptionis categorizedas detrimental. From this conception we develop a model in which policy choices related to corruption may be systematically evaluated from a welfare optimization per(8) spective. This model has implicationsfor dWL(S,R,f')> dWL(R3). public policy concerningcorruption,and Note that increasedstructuralefficiency suggeststhat in cases of beneficialcorrupwill also yield obvious externalbenefitsto strategymay warrant tion the appropriate If the noncorruptsociety WG(R3). these additional resources to alter inefficient benefitsare significant,then social structures. This is a significant > [dWL(S,R,f')+ dWG(R3)J dWL(R3). departurefrom the traditionalapproach corruption,which treats to administrative (9) as transactions thoughthey all illegitimate were the same as most other criminal These three options suggest that social welfare is maximized when corruption activity, and thus relies upon individual control policy is directedat the appropri- deterrentpolicies. The model accounts for variations in ate type of illegitimate activity. Since impactof corruptionas the distributional beneficial corruption is caused by in117

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well. However, the choices of welfare optimizationstrategiesmust ultimatelybe tempered by a society's notions of distributive justice and fairness. This researchhas provideda systematicframework for evaluation of public policy choices, and a basis from which the distributive questions can be approached. Furtherresearch is required before any definitive statements can be generated concerning distributive equity and corruption control policies. It is our hope that this research will stimulate further analysis that will answer some of the remainingquestions.
involved in collectial becauseof the inefficiencies of tive decision making. Implementation a costeffective measuremay be delayed due to political considerations. 6. When welfare maximizationis divided into conditions, it separateefficiencyand distributional can clearlybe shown that F is Pareto optimal, and by even thoughit is justifiable society'swelfarefuncP'. tion, it is not a welfaremaximum In thiscontext, corruption which moves society from P to F is beneficial. Compensation schemes such as nonto taxesor subsidiescan be introduced distortionary move society to point P'. The transition toward welfare maximumcan also be eased by clarifying propertyrightsand by improvingthe and redefining politicalstructure. 7. The distributiveconsequencesof egalitarian, can formulations be clariRawlsian,and utilitarian welfarefrontierwhichconsists fied on a generalized sections. of both upward- and downward-sloping UAUBdiagram,then,an egalitarian On a generalized outcomeswhen a approachwill favor distributional minimaxpoint is reachedon the welfare frontier, and the utilitarianwill seek the tangencypoint on portion of the welfarefronthe downward-sloping tier. In this study, we use a Paretowelfarefrontier which has a downwardslope, as shown in Figure1, with no intentionof reasoningin favor of any of the threeoutcomes.Followingthe convention,we refer to the Pareto welfare frontierbecause of its theoefficiencyand reticalconveniencein dichotomizing problems.Formoreon this see Graaff distributional (1975, pp. 59-70). 8. Without specifically referringto corruption, Becker(1968) and Ehrlich(1973, 1975) stress two of with theprobability one cost variables: associated and apprehension convictionp, and the otherwith a f. the extentof punishment By establishing causal link between the crime rate and each of the two variables,Beckerand Ehrlicharguein favor of the crime. methodof preventing deterrent 9. Corruptionis assumedto exist in both liberal What might be and conservativeadministrations. expectedto vary is the locationof the corrupttransaction. Liberal administrationstend to increase in expenditures the area of social programs,which would provide increasedaccessibilityto corruption suchas the poor liberalconstituencies for traditional administrations and labor.Conversely,conservative tend to increase appropriationsfor business and military subsidies, and corruption in these areas conservative would be expectedto favor traditional constituencies. 10. There are several empiricalinvestigationsin that suggestthe possibilityof reduced the literature in participation specificcases of crimeas eitherthe and probabilityof apprehension convict on p or the degree of punishmentf increased.For a review of these studies see Tullock (1980), and Witte (1980). 118
would select a point on a

1. The Pareto optimum setting is an output performance criterion in the neoclassical interpretation of economic efficiency. In this analysis it is used as a reference. Other constructs of normative output performance can also be used. For more on Pareto optimality and other forms of outcome performance criteria, see De Allesi (1983). 2. In this analysis we assume a society where government involvement in the economy revolves around public goods production. Individuals are rational, and through a market-oriented collective decision-making mechanism they reveal their preferences. Again, these assumptions are made to reveal the essential features of corruption in a marketoriented society. It is important to emphasize that a similar conception of corruption can be also used in centralized or authoritarian societies. 3. Every point on the welfare frontier UAUB is Pareto efficient, and represents a possible distribution of real income (utility) between two income segments A and B. The Bergson-Samuelson social welfare function (W) is one of the most commonly used analytic devices, representing society's distributional judgment. In this study, W is used in its general form, W( ), to generate arguments on distributional consequences of corruption. Its point of tangency with the welfare frontier UAUB determines the most desirable allocation among all possible Pareto-efficient allocations. For more on this see Tresch (1981, pp. 17-42). 4. Note that the generalized Paretian efficiency criteria extend to all types of individual optimizations and include additional constraints relating to the system of property rights, including transaction and adjustment costs. See De Allesi (1983). 5. From the economist's perspective, this implies that additional costs must be incurred to introduce structural changes. Usually these costs are substan-

line. A Rawlsian

1986 Policy-Oriented Theory of Corruption

Forstudieswhichchallengethe deterrent methodsee Bowersand Pierce(1975),Cook (1980),Forst(1976), Passelland Taylor (1977). 11. See Becker(1968).
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Tevfik F. Nas is Associate Professorof Economics,Albert C. Price is Associate Professor of Political Science, and CharlesT. Weberis Associate Professorof Economics, Universityof Michigan-Flint, Flint, MI 48503.