What’s the dirtiest secret about corruption? Just how little we know about it. Treasuries are plundered and kickbacks are paid, but the nature and scale of the world’s shady transactions largely remain a mystery to us. Luckily, a little economic detective work is all that is needed to expose the smuggling, cheating and bribing that is hiding in plain sight.
What little systematic evidence we do have comes from surveys by groups such as the World Bank and Transparency International. But we economists are skeptical of what people say about corruption. It’s called “cheap talk” for a reason. And we’re especially suspicious of what people say when surveyed on sensitive topics such as bribery and embezzlement. It’s obvious that responses to the question, “How much did you receive or pay last year in bribes?” are of questionable accuracy. So it’s hard to know where it’s really thriving, let alone figure out what to do about it. But all is not lost. The hidden underworld of corruption often reveals itself in unexpected ways – and in situations that allow us not only to measure actual corruption but to test different methods of preventing it. All that’s required, it turns out, is a little economics and a dash of ingenuity. To truly understand corruption, we must watch what people do, rather than just listen to what they say. And as we’ll see, damning evidence, like cash-filled suitcases, often leaves footprints in the data for those who know where to look.
Economics is fundamentally about how people respond to incentives. So, if we forensic economists want to unearth corruption, we must look for situations where incentives for crooked rewards somehow translate into actions that everyone can see.
Price of political connections
Whether through hefty campaign contributions or cushy jobs for former politicians, corporations are constantly accused of trying to profit through political ties. (just think Halliburton or Russia’s Gazprom). But what’s the real value of these companies’ connections? If you ask politicians or investors, you’re likely to hear lots of denials. To get the truth, we could ask insiders to put some money where their mouths are, making them bet some of their own cash on whether particular companies are making back-alley deals with politicians to increase their profits. Raw financial self-interest would lead bettors in the know to reveal their true beliefs about corruption.
What little systematic evidence we do have comes from surveys by groups such as the World Bank and Transparency International. But we economists are skeptical of what people say about corruption. It’s called “cheap talk” for a reason. And we’re especially suspicious of what people say when surveyed on sensitive topics such as bribery and embezzlement. It’s obvious that responses to the question, “How much did you receive or pay last year in bribes?” are of questionable accuracy. So it’s hard to know where it’s really thriving, let alone figure out what to do about it. But all is not lost. The hidden underworld of corruption often reveals itself in unexpected ways – and in situations that allow us not only to measure actual corruption but to test different methods of preventing it. All that’s required, it turns out, is a little economics and a dash of ingenuity. To truly understand corruption, we must watch what people do, rather than just listen to what they say. And as we’ll see, damning evidence, like cash-filled suitcases, often leaves footprints in the data for those who know where to look.
Economics is fundamentally about how people respond to incentives. So, if we forensic economists want to unearth corruption, we must look for situations where incentives for crooked rewards somehow translate into actions that everyone can see.
Price of political connections
Whether through hefty campaign contributions or cushy jobs for former politicians, corporations are constantly accused of trying to profit through political ties. (just think Halliburton or Russia’s Gazprom). But what’s the real value of these companies’ connections? If you ask politicians or investors, you’re likely to hear lots of denials. To get the truth, we could ask insiders to put some money where their mouths are, making them bet some of their own cash on whether particular companies are making back-alley deals with politicians to increase their profits. Raw financial self-interest would lead bettors in the know to reveal their true beliefs about corruption.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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