Guest Post: Behavioral Economics, Punishment, and Faith in the Fight Against Corruption

The following guest post, by Roberto de Michele, Principal Specialist in the Institutional Capacity of the State Division at the Inter-American Development Bank (IDB), is a translated and slightly modified version of a post that Mr. de Michele originally published in Spanish on the IDB’s governance blog on August 29, 2016:

Last August, Hugo Alconada Mon, one of Argentina’s most prestigious investigative journalists, published an article (in Spanish) describing how road construction firms in Argentina created a cartel to fix public work contracts. Members of the cartel would meet in the board room of the sector chamber to conduct their business. The room has a statue of Our Lady of Luján, patroness of Argentina. Before commencing negotiations to fix contracts, assign “winners,” and distribute earnings, members of the cartel would turn around the image of Our Lady of Luján to face the wall, with her back to those gathered there. It was, as one of the sources candidly put it, “so that she doesn’t see what we were about to do.” This remark got me thinking about two possible explanations on why we break the law, cheat, and lie both to the government and to others.

Nobel-prize winner Gary Becker put forth one such theory. In his view, criminals are rational individuals who, before committing a crime, engage in a cost-benefit analysis. In its simplest form, Becker and others believe that criminals first estimate the amount they may obtain by breaking the law. They compare that value to the size of the penalty, discounted by the probability of being caught and receiving a punishment. In other words, if the benefit of the illegal act exceeds all other costs, the person will likely engage in the criminal act. Policymakers following this approach are interested in tilting the balance by increasing the cost of crime. And though Becker himself emphasized the size of the penalty, these days the evidence suggests that the more important factor is more often the likelihood of detection. That said, the effective imposition of a sanction is also very important, including actions aimed at stripping the person from the economic benefits of the crime.

The other theory comes from the realm of behavioral economics. One of its notable proponents is Dan Ariely, who explores why many individuals “who, although they value morality and want to be seen as ethical people, regularly fail to resist the temptation to act dishonestly.” Again, summarizing a sophisticated and complex theory, under this approach we should look at other factors to understand why people lie or break the law: the environment in which we work, the example set by others, the way in which leaders behave, and what Ariely calls the “moral compass.” Indeed, a key insight of this line of research is the fact that, as Jason Dana, George Lowenstein, and Roberto Weber argue, “the desire to appear ethical to oneself and others can exert a powerful influence on human behavior.” However, as they also emphasize, “people have a remarkable ability to rationalize unethical behavior or to actively position themselves … to achieve ‘ethical immunity’ by not facing up to the consequences and obvious interpretations of their actions.” Policymakers convinced of the advantages of this approach look to improve what is called “choice architecture,” using myriad tools to prod people to do the right thing, including information, incentives, and positive feedback to those who comply with the law.

Taking both theories in the best light, we can imagine that with less impunity (increasing the cost of crime) along with more transparent and accountable bidding mechanisms and highlighting ethical behavior (improving choice architecture, nudging and confirming the value of the moral compass), it would be less likely for people to engage in illegal behavior. Of course, this is no easy task. We should not forget that it is really difficult to find out how corrupt deals are structured. They occur behind closed doors, and – as suggested by Alconada Mon – within close-knit circles of trust. Yet there are some promising examples of initiatives that draw on these ideas, such as the Inter-American Development Bank’s projects with the Contraloria Geral da Uniao in Brazil on strengthening monitoring capacity while facilitating citizen participation to control public spending at the municipal level, as well as another IDB-supported project in Bolivia, giving technical assistance to the Ministry of Public Transparency, and recouping about US$ 50 million from corrupt deals with only a US$ 5 million loan.

Maybe in addition to these efforts, perhaps someone could also bolt the statue of Our Lady of Lujan to the floor?

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