In 2015, following indications that a few Canadian Senators had been using government money for disallowed personal expenses, the Canadian government launched a major investigation that cost approximately $23 million—but led to no convictions, and exposed corruption that cost the government less than $1 million. To many, me included, this seems like overkill, even if we acknowledge that corruption is a serious problem. Yet the “zero tolerance” ethos that motivated the Canadian Senate’s investigation is widely embraced. As previous posts have pointed out, zero tolerance policies fail to account for the fact that corruption might be expensive to root out, and that the extraordinary expenditures required to reduce corruption closer to zero might not, after a certain point, be justified.
This does not mean that corruption is good. But the efficient amount for the government to invest in corruption-reduction—which in turn determines the amount of corruption that will prevail—is that for which, as an economist would put it, marginal benefit equals marginal cost. Or to put this another way, “tolerance” of some corruption is efficient (and appropriate) once the costs of achieving further reductions in corruption are greater than the costs of the corruption that would be eliminated by those additional efforts.
The right amount of corruption, therefore, is probably not zero. Existing anticorruption policies neglect this point, leading to inefficient spending like that on the Canadian Senate probe. With that understanding, how can anticorruption policy be targeted to get the biggest bang for the buck?
- First, the government should invest more in anticorruption efforts in those areas where the marginal costs of corruption (and hence the marginal benefits of corruption reduction) are higher. Money stolen from orphanages is worse than money stolen from the parks departments of wealthy cities, not just because it feels worse, but because the marginal value of the dollars stolen from orphanages would have been higher. More generally, corruption in more budget-strapped programs, and in poorer countries, likely has a larger marginal impact, and so justifies more aggressive corruption-reduction efforts. For this reason, it makes sense to pursue more aggressive anticorruption measures in developing nations, not just because the potential for systemic corruption is higher in these countries, but more importantly because it is in those countries that corruption reduction is likely to have the greatest positive impact on people’s welfare. And within any given country, anticorruption efforts should be targeted toward programs that service the impoverished, because dollar-for-dollar, providing more resources to the least-well-off has the greatest social benefit.
- Second, it may make sense to invest relatively less in reducing those forms of corruption that involve a transfer of resources, but do not otherwise lead to significant misallocations, distortions of incentives, or other inefficiencies. By contrast, relatively more investment should be made to combat those forms of corruption that involve destruction of value, rather than simply transfer of value. As an illustration, consider the contrasting examples presented by Professors Banerjee, Mullainathan, and Hanna: In an infrastructure procurement context, say for a road construction project, it might be the case that the most efficient firm (that is, the firm that can build the road at lowest cost) may be able to offer the largest bribe. If that is so, then even if the procurement official cares only about maximizing the size of the bribe he can collect, he will still end up awarding the construction contract to the most efficient firm. By contrast, suppose a public health official is allocating health care resources like hospital beds, and does so on the basis of bribe payments. If those who need the beds the most are also the poorest, their inability to pay bribes will lead to an inefficient allocation of beds to wealthier, less unhealthy individuals. In this circumstance, the bribe isn’t just a transfer, but causes a serious, harmful distortion in the allocation of government resources. The second example is much more harmful than the first, and anticorruption policy should therefore prioritize those forms of corruption that are most likely to create these sorts of distortions.
- Third, an important qualification to the preceding claim is that it considers only the direct costs of corruption. Even corruption that does not entail inefficient misallocation of resources can have hard-to-quantify “spillover” costs, including reduced trust in government and lower civic engagement. But we must be careful not to automatically invoke spillover costs to justify arbitrarily high levels of investment on anticorruption efforts. Consider the Canadian Senate example, in which $26 million was spent to root out less that $1 million in misappropriated public resources. Unless we think the spillover costs of that corruption were are an order of magnitude bigger than the actual money recovered, this audit was unnecessarily expensive.
- Fourth, the government should focus on low-cost solutions to enforcement of anticorruption provisions. For example, whistleblower statutes with bounties tied to the recovery of public money, such as those used by the US Internal Revenue Service and Securities and Exchange Commission, are a very effective way to compensate individuals, as the government always ends up paying less than the amount the government recovers.
Rather than reflexively embracing expensive “zero tolerance” policies, governments should develop cost-effective anticorruption efforts that consider issues such as allocative efficiency and marginal benefit. The political will to accomplish this may be lacking, as it can appear “soft on crime” to forgo prosecution of certain types of corruption in favor of a more nuanced enforcement. But effective policy is not built on zealousness: rather, behaving in the interest of the public good requires a thoughtful, measured, and economically savvy approach.