About Haggai Porat

LL.M. (Law) Candidate, Harvard Law School M.A. (Economics) Candidate, Tel Aviv University

Israeli Prime Minister Benjamin Netanyahu’s Flawed and Irrelevant Defense to Bribery Allegations

After three years of investigations, it’s likely that Benjamin Netanyahu will soon become Israel’s first sitting prime minister to be indicted. The indictment, which has already been published by the Attorney General though not yet submitted to the court, accuses Netanyahu of several crimes of corruption. One of the most serious allegations (commonly referred to as “Case 4000”) is that when Netanyahu served as both Prime Minister and the Minister of Communications, he took steps to promote a deregulation of the telecom sector that would greatly benefit Shaul Elovitch, the controlling shareholder of Bezeq, one of Israel’s largest telecom firms. In particular, Netanyahu is alleged to have pushed for a decision allowing Bezeq to merge with another Israeli telecom giant. In return, Netanyahu allegedly received favorable media coverage from a news company controlled by Mr. Elovitch during two general elections.

Netanyahu has yet to submit a formal statement of defense to the charges, but given his countless press releases and interviews, it’s easy to predict what he will say. In particular, Netanyahu and his spokespersons have repeatedly argued that “decisions Netanyahu made regarding the telecom giant when he was communications minister were reasonable, had the support of the ministry’s professionals and were approved by the legal gatekeepers” (emphasis added). It’s not clear at this stage whether it is in fact true that the professionals in the Ministry of Communications also supported the merger. But suppose it were true. Why would it matter? Why would this be a defense to the bribery charges? Netanyahu and his supporters have remained vague, perhaps intentionally so, on this point. But there seem to be three possible arguments that he might advance as to why the Ministry professional staff’s (alleged) agreement with his position supplies a defense to the bribery allegation. None of these arguments has merit, and the court should dismiss all of them.

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What Is the Effect of Market Competition on Corruption? Some Surprising New Findings

How does market competition affect the prevalence of corruption? Some people think that increasing competition could decrease corruption (see here and here). The intuition is that increased competition lowers firms’ profits, meaning that public officials cannot extract as much money out of the firms through extortive threats (e.g., a threat to falsely report noncompliance with safety regulations unless the firm pays a bribe). As the saying goes, you can’t squeeze blood from a turnip. By contrast, the argument continues, in less competitive markets firms have higher profits, and officials, knowing this, can use threats to extract some or all of this surplus for themselves. However, others have argued that increased market competition may lead to more corruption. Those taking this position tend to emphasize collusive rather than extortive corruption (see here and here) and point out that increased market competition makes collusion—which is, of course, a risky proposition—more attractive to firms, because the firms have more to gain from a leg up on their competitors. For example, an importing firm that pays a bribe to avoid paying customs duty will receive greater benefit from this competitive advantage when competition is fierce, since it will allow the firm to reduce prices and increase its market share more extensively. A monopolistic importer, by contrast, has less of an interest in paying the bribe to avoid the import duty, since a monopolist can offset much of the duty by raising consumer prices without needing to worry about losing much market share.

So, one can construct plausible theoretical arguments in both directions. What does the empirical data say about which story is closer to the truth? There have been a handful of studies so far, but they provide contradictory or equivocal results—some studies find that more competitive markets are associated with less corruption (see here, here and here), but others have found the opposite. But these studies focus on “corruption” generally, while the theories sketched above suggest that the effect of market competition on corruption may differ depending on the type of corruption—coercive or collusive. One prominent study, by Alexeev and Song (2013), explicitly incorporates this distinction and finds—based on analysis of data from the World Bank Enterprise Surveys of manufacturing firms in different countries—that increased competition increases the prevalence of collusive corruption. While this is an important step in the right direction, the survey data used here is still not ideal: the measure of “collusive corruption” is based on the respondent firms’ answer to a question about the amount of money firms in their line of business typically need to pay to public officials each year “to get things done,” which seems both vague and potentially overinclusive.

Luckily, later on the World Bank Enterprise Surveys expanded the range of corruption measures collected as part of its Investment Climate surveys in developing countries, recently publishing the latest of these surveys (get the data here), that may shed new light on this debate. The attractive feature of this more comprehensive survey data is that, in contrast to the data used by Alxeev and Song, the new surveys ask not only about the one vague measure of corruption, but ask separately about four different kinds of informal payments: to tax officials (hereinafter tax bribe); to secure government contracts (hereinafter contract bribe); to secure an import license (hereinafter import bribe); and to secure an operating licensing (hereinafter operating bribe). The survey, both in its current and older version, further asked every firm to report the number of competitors that it faces in its market of operation, which provides a ready firm-specific measure of market competition.

A thorough analysis of the competition-corruption link using this new data will need to await future work, but as a first step, I conducted some preliminary, exploratory quantitative analysis of the Investment Climate survey data. The results were surprising, and suggest not only is asking whether “corruption” is positively or negatively correlated with market competition is too crude, but also that even the proposed collusive-coercive distinction does not adequately capture the nuances of the relationships between competition and various forms of corruption.

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