On a Game Theoretic approach to Corruption in India

It is just over a month after the din about Anna Hazare’s hunger strike that recieved popular support as the people’s fight against corruption has died down. A peaceful Gandhian protest that tapped into the anger and humiliation that ordinary people feel when they have to beg and plead for what should be rightfully theirs by process or turn. The shame of having to stoop to underhand tactics, to scrape the bottom of the barrel and bow down to officialdom was compounded by the large scale of corruption unearthed just after the Commonwealth Games were held in Delhi.

The people’s protests, the Lokpal Bill, the hundreds of gatherings across the country did bring the issue to the fore. And while progress is slow, there are germs of solutions emerging from the people. Among them our economists, with a very interesting approach to solving the problem using game theory mechanics.

Kaushik Basu’s paper has proposed a unique micro-economist’s solution to the pressing issue of corruption at every level of government. The paper is well timed, with public opinion mobilized against corruption that has seeped through to almost every interaction we have with the authorities. Corruption is a complex tax, levied by authority, without any legitimate authority on transactions that pass through their gates. It is the exercise of powers given to the gatekeepers, whose only job was to keep the pathways safe, clear and efficient. By virtue of this position, they are able to charge what economists call – rent.

The paper has much merit, though intended to be merely academic. Firstly, of course it has spawned debate at an intellectual and policy level that the groundswell of protest action was unable to do. It also asserts the responsibility of government departments to be fearless and pro-active thought leaders. And yet, in parts, it disappoints (or holds out hope for more work that will follow), for it only looks at the act of bribery as a one-to-one transaction. When we include the possibility that there can be cartels and groups, indeed even a monopoly of the rent seekers, then the power balance shifts totally in one direction rendering the proposed legislative change toothless.

In a way, all bribes are the price of access to authority, influence or business. Prices, in free places are often determined by market forces – as are bribes. The corruption eco-system in many places is quite sophisticated with the elements of supply chain, price discovery mechanism, customized pricing and regional market variations all in place. Sometimes, the grey market system also works as a price equalizer across markets. A few years ago, I was surprised to discover that my ‘consultant’ was able to obtain a telephone connection in a ‘technically infeasible’ area within a day (these were the days before mobiles and private providers) and the fees for such services were almost exactly the same that I paid British Telecom for a new connection in the UK at the same time. On asking friends across three or four other countries, the price of a new telephone connection came to about the same. I am assuming that my consultant paid a fee that greased the supply chain – or was it that the fee was for his expertise in knowing the process and being able to navigate it efficiently.

In either case, the market mechanism discovered a price that proved as accurate as the Economist’s price and currency indices based on the McDonald’s burger. Casting the moral argument aside for a moment, which is equally valid, I would like to raise the question: Is bribery a fair market price for services provided and should it not be accorded the same legitimacy as any other free market mechanism? It does perform the same functions that any price does – that of information, regulation of demand and feeding the supply chain. So, is could corruption be legitimate?

No, never. For two simple reasons that stand out amongst many – One: it is inequitable. It is a greater burden on the poor, the disadvantaged or even those who live at a greater distance from the centre of power. And two: It is the price set on an artificial construct – the regulator. Bribes are not paid for free market goods. They are the price for navigating the bureaucratic jungle, the price paid to the gatekeeper. The gates i.e. the regulations, the paperwork, the clearances etc. are not part of free market processes and have been imposed by the powers of the day.

While I accept that some degree of regulation and control is the function of governments, especially as they seek to direct action and investment towards long term goals – the existence of a bribing culture should be a warning signal that such long term imperatives are being ignored, as the gate opens to locally provided grease. The existence of bribery indicates that either government systems are too complex to traverse by legitimate paths, or, the general public are not convinced of the worth of these long term goals that the regulations seek to protect, or, that the gatekeepers are opportunistically dishonest. Dr. Basu’s solution only seeks to address the third issue, and from a theoretical point of view it is a brilliant solution. Under current regulations, both the bribe taker and the bribe giver are equally culpable, thus their interests are aligned. The proposed solution seeks to break this unholy alliance and puts all the penalties on the bribe taker. In fact, the bribe giver can get a full refund on the bribe paid if he blows the whistle on the transaction.

From a game theoretic point of view, this is absolutely brilliant. If, every transaction and business relationship is seen independent of others. Yet, life, taxes and business are not independent transactions. By raising the stakes for the bribe takers, who are already in positions of power, the game is raised. Once the bribe giver has either refused to pay a bribe or sought penalty for such an act, his rating as a counterparty drops. For any future transactions with the rent seeking gatekeepers, the whistleblower is seen as a high risk counterparty. It may be so that the counterparty risk becomes so high that one may need a ‘guarantor’, a paid service, in addition to the facilitation fee – the bribe. This flaw arises only because most of us have to deal with authority on a regular basis – from our annual tax returns, to clearances for businesses we want to run. By raising the risks for the bribe takers in a system that is sadly well entrenched, we may be raising the risk premium and therefore the price (bribe) of each transaction. In some ways, the proposal also creates a weapon against those in positions of government authority, whether honest or not. Once accused of receiving a bribe, proven by unrequited receipts from planted sources, the penalties and ignominy is severe. This lends itself to risk free entrapment schemes for the ill-intentioned. The solution to corruption may well lie in such legislation, well debated and crafted. But it will never be the whole solution.

Solutions lie in reducing the power and legitimacy of corruptible gatekeepers, in creating simpler pathways through bureaucratic jungles and in seeking true commitment to the greater goals that the regulations seek to achieve.

Note:

The original paper can be downloaded from the ministry website here and Kaushik Basu’s own response to the paper can be seen here

This article has been published in the July 2011 issue of Pragati magazine and can be accessed here. An abridged version was also published by Mail Today on July 19, 2011 and can be seen here.