Johann Graf Lambsdorff, Professor of Economic Theory at Passau University, contributes the following guest post:

Some of our current approaches to corruption prevention perform badly. One reason is that many preventive methods are built on distrust towards officials and employees, who are seen as potentially corrupt actors. Yet research in behavioral science has provided us with impressive evidence that (many) people are (mostly) trustworthy, intrinsically motivated, and responsive to encouragement, praise, expressions of gratitude, and criticism. The problem with assuming that everyone is prone to engage in corruption if not carefully monitored is not only that prevention strategies premised on that assumption are very costly, but also that such approaches can be counterproductive: The atmosphere of distrust that they create can reduce interpersonal trust, intrinsic motivation, and the self-esteem that people get from contributing to public goods and working responsibly.

Economists have labelled these adverse collateral consequences “the hidden costs of control.” In a recent paper entitled “Preventing Corruption by Promoting Trust – Insights from Behavioral Science”, I explain how taking this phenomenon, as well related insights from behavioral sciences about creating positive incentives for good behavior, can help us design more effective policies. The paper illustrates this with the help of six examples:

• First, consider the “four-eyes principle,” the idea—widely employed in both the public and the private sector—that one can improve behavior by having people in teams of two monitor each other. But the evidence shows that this approach not only fails in reducing corruption, it may even increase corruption. The reason is that the diffusion of responsibility diminishes a sense of individual responsibility for ethical conduct. Officials are tempted to think: “If a second employee does not intervene, it might be justifiable to take a gift.”
• Second, another standard approach to preventing corruption is to limit official discretion. For example, in the case of procurement, officials are often required to base their decisions only on objective and predetermined criteria. This is supposed to make it harder for corrupt officials to manipulate the procurement process. But this approach also means that honest procurement officers cannot use their experience for selecting high-quality and uncorrupt suppliers. Moreover, the impulse to eliminate discretion often requires procurement officials to pick the lowest price offer, completely disregarding issues of quality. Quality is then guaranteed by complex tender documents, which specify all relevant details. Officials’ task is reduced to checking that bids comply with the tender documents. But the increasing complexity, in turn, can act as a deterrent to bidders, generate inefficiencies, and suffocate competition.
• Third, another example of a context in which the desire to eliminate official discretion (in the name of fighting corruption) has counterproductive effects concerns development aid. Development aid often requires cooperation with local partners, but picking reliable and trustworthy partners often requires trial and error, and gradually accumulated and disseminated experience shared within the development community. Development workers can take this approach only if they have the discretionary power to use their collective experience. But often development workers are required to select partners using formal, verifiable systems. Not only does this prevent aid officials from making use of their accumulated (but difficult-to-formalize) experience, it also leads to a bias in favor of contracting with large international companies, which tend to have the requisite control systems, rather than with local partners. This leads to less job creation and human capital development at the local level.
• Fourth, many organizations have policies that require employees to sign “compliance statements,” declaring that they conducted all tasks and responsibilities in accordance with requirements set forth by a code of conduct, and that they abstained from paying or taking bribes. The thinking behind such compliance statements is generally sound: Behavioral science is full of examples on how small moral reminders can have a substantial impact on behavior. However, the research also shows that to be effective, these moral reminders must be very short, intuitive, and provided at a time when they are salient to decision-making. Unfortunately, many compliance statements tend to be complex and lengthy, and are signed long after decisions have already been made. This renders the documents a largely ineffective formality.
• Fifth, many organizations (both public and private) over-rely on formal compliance procedures. Law enforcement may be more lenient to firms whose employees paid bribes if the companies can provide evidence of such measurable and verifiable procedures (whether as a matter of formal statutory law, as with the UK Bribery Act, or prosecutorial policy, as with the US Foreign Corrupt Practices Act). If a company’s employee pays a bribe, the company can point to the “adequate procedures” (allegedly demonstrated by signed compliance statements, expenses for ethics training, and the like), state that the employee violated official guidelines, and assert that the company bears no corporate responsibility. This, in turn, gives corporate leadership perverse incentives to act in a hypocritical way, indirectly pressuring employees into bribery (for example, through bonuses contingent on successful acquisition of contracts or unrealistic sales targets) while whitewashing the corporation’s responsibility with the defense of “adequate procedures.” These incentives undermine employees’ individual responsibility for ethical conduct.
• Sixth, widespread evidence shows that the so-called “tone at the top” has a profound impact on behavior, more important than the measurable and verifiable procedures. People react to praise and criticism by corporate leaders and their business partners. For example, companies often vet their suppliers, intermediaries and sellers in order to make sure these avoid corruption. But the associated due diligence focuses on verifiable evidence and disregards the tone at the top, because its assessment is subjective and not objectively measurable. In fact, communicating the “softer” and more subjective factors could do better in preventing corruption.

Methods for preventing corruption currently focus on measures whose existence and implementation can be verified solidly by outside observers. Organizations and corporations across the world thus demand that their employees sign annual compliance statements, attend costly ethics training, expose them to time-consuming control systems, rigorously apply the four-eyes principle, limit their discretionary power, and disallow them from using their subjective experience. Experimental evidence shows that these methods perform badly. But companies that employ these methods are preferred in public procurement and in court even if the tone at the top is poor. Behavioral science research suggests that prevention measures can be more effective if they focus not only on objective criteria but also on less tangible factors such as sentiments, expectations, social norms, praise, communication, and non-monetary incentives. Policies should aim at finding a better balance between a trustful attitude towards the majority of trustworthy officials and employees, and the deterrence that is unfortunately still needed for disciplining the potentially corrupt.