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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Amazonia Is Burning. Corruption Is One of the Reasons.

Amazonia is the largest tropical rainforest in the world, spread over nine South American countries (Brazil, Bolivia, Colombia, Ecuador, Guyana, French Guyana, Peru, Surinam, and Venezuela), with approximately 60% of the forest (over four million square kilometers) located in in the north of Brazil. Brazilian Amazonia is home to around 45,000 different plant and animal species. This rainforest is also crucial to the global environment, especially with respect to climate change. During the past several months, an increase in the number and extent of forest fires in Brazilian Amazonia has triggered great concern, much of it focused on whether the Bolsonaro Administration’s policies are partly to blame for the widespread fires. While that conversation is no doubt important, it is also crucial to recognize that environmental crimes in Amazonia—including those related to the fires—are in part the product of widespread corruption, and that addressing Amazonia’s environmental crisis will require addressing Brazil’s governance crisis as well.

To understand how and why corruption is contributing to the destruction of the Amazon rainforest, a bit of background is in order. The greatest environmental threats in this region are the illegal harvesting of timber and the illegal clearing of land (often through burning) to prepare the land for commercial use for agriculture and livestock. (Between 70% and 80% of the deforested area in Amazonia has been used to create pasture for breeding cattle to produce meat for domestic and international consumption.) To be sure, Brazil has laws in place to protect Amazonia from over-exploitation and other forms of environmental damage. About 80% of the land in Amazonia is publicly owned; on this public land, the forest may not be exploited or burned. The remaining 20% of Amazonia is private land owned by individuals or corporations; even for this privately owned land, Brazilian law requires that the owners keep between 50% and 80% of the area intact and unexploited. The Brazilian government is responsible for enforcing these rules and for regulating and overseeing the extraction, transportation, and commercialization of timber from Amazonia. The regulatory system involves government approval of forest management plans, the issuance of permits for timber harvesting and land clearing, and the tracking of timber to ensure that it was not illegally removed from public lands or from the protected areas of private lands.

That’s how it’s supposed to work. But in practice, private companies collude with corrupt public servants—forest wardens, police officers, and others—to evade these rules. As a result, substantial quantities of timber are illegally extracted from public lands and protected private areas, and agricultural and livestock interests illegally burn and clear irreplaceable forests. The corrupted public servants not only turn a blind eye to these environmental crimes, but they also warn the infringers about possible inspections by other agents.

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Guest Post: Fighting Police Corruption in London, and Beyond

Today’s guest post is from Matt Gardner, who previously served as the Head of Anti-Corruption at New Scotland Yard, Metropolitan Police, and who is currently covers police-related issues or CurbingCorruption.Com (whose launch in October 2018 GAB covered here).

The Metropolitan Police in London (the “Met’) is a large city force, with 30,000+ officers policing a city of over 10 million on any working day. Even in a well-trained professional force like this one, keeping police corruption down to low levels is a constant challenge. The ordinary difficulties of tackling corruption are compounded by the authority that the police are entrusted with: If you are a thief, a sexual predator, a bully, or lean towards corruption and criminality, joining the police service in any country is an excellent career choice. You can hide behind your warrant card, police ID, or uniform.

So what can police departments do to keep corruption within their own ranks in check? In this post, I want to highlight the four most important tools for keeping police corruption at low levels, using the Met’s experience to illustrate each of these elements: Continue reading

Quid Pro Quo: A Primer

Thanks to the Trump impeachment imbroglio, Americans are brushing up on Latin.  Or at least on the Latin phrase quid pro quo. Though Trump’s partisans and opponents are at each other’s throats about virtually everything, a consensus has emerged that if his dealings with Ukraine involved a quid pro quo, he is in trouble. The reason: the U.S. Supreme Court has repeatedly held (examples here and here) that the touchstone of the American federal crime of bribery is the presence of a quid pro quo. If the impeachment investigation were to uncover one in his Ukraine dealings, Trump would be guilty of bribery, one of three crimes, along with treason and high crimes and misdemeanors, for which he can be removed from office under Article II of the U.S. Constitution.

Quid pro quo means “this for that,” the archetypal example being someone who provides “this money” for “that action” by a public official. But the translation misleads by its simplicity, glossing over critical questions which Congress will have to answer in deciding whether Trump should be removed from office for his actions involving Ukraine:

Must the “this for that” be in the form of an explicit agreement?  Must, that is, there be a meeting of the minds between the two?

Or is a promise enough? That the payer or the recipient merely asked for something – a payment, the performance of an official act — from the other.

Must the terms of the agreement or promise be express? Stated clearly, leaving nor room for doubt. Explicit? Put into words whether written or not.

The Supreme Court, the lower courts, and academic commentators have wrestled with these questions for decades, and while not bound by their answers in an impeachment proceeding, Congress should surely pay heed to them. The federal judiciary arrived at them not during a white-hot partisan debate, with one eye on the effect of one’s chances for reelection. Instead, the answers were reached after deliberate, studied attention to the facts, to answers reached in previous cases, and to the consequences the answers would have on public servants’ future conduct.

Members of the House and Senate are not the only ones that would profit from a study of the American law of quid pro quo. Prosecutors, judges, and legislators in other nations would as well, for the quid pro quo requirement is part of all nations’ antibribery statutes (expressly stated in article VIII of the InterAmerican Convention Against Corruption and article IV of African Union Convention on Preventing and Combatting Corruption and following directly from the texts of the United Nations Convention Against Corruption (article 15), the Council of Europe Criminal Law Convention on Corruption (article 2) and the OECD Antibribery Convention (article 1)).  The United States is not the only nation with a bribery jurisprudence (here and here), but thanks to its size, aggressive law enforcement, and quality of its judiciary, its case law applying the quid pro quo standard is surely richer than most if not all.

A primer on it is below. Continue reading

New Podcast Episode, Featuring Shaul Shalvi

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this episode, Nils Köbis interviews Professor Shaul Shalvi, of the University of Amsterdam’s Center for Research in Experimental Economics and Political Decision-Making (CREED), about how experimental research in behavioral psychology can help us understand corruption, and unethical behavior more generally. In addition to covering some of the main experimental results on ethical behavior (some of which can be found here), Professor Shalvi also discusses how and when children develop the ability to cheat, and the shift in research on ethical decision-making from an individual perspective (studying people who make ethical decisions by themselves) to a more social perspective (studying contexts in which people make ethical decisions together). This latter perspective considers questions like how unethical behavior by some can encourage others to break ethical rules as well, and how the perception of the identity of the victim (an abstraction, like “society,” versus a concrete person or people) can affect people’s willingness to break ethical rules.

You can find this episode, along with links to previous podcast episodes, at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

One Year After Bolsonaro’s Election, How Well Is His Administration Fighting Corruption in Brazil?

Exactly one year ago, on October 28th, 2018, Jair Bolsonaro, a right-wing congressman and former army captain, was declared the winner of Brazil’s presidential election after receiving 55.13% of the valid votes. He defeated the center-left-wing Workers’ Party (PT) candidate Fernando Haddad, ending the PT’s streak of four consecutive presidential election victories that had begun in 2002.

Brazil’s corruption problem played a major role in the election and in Bolsonaro’s victory. The Car Wash Operation had not only uncovered widespread corruption scandals during the PT administrations, but that Operation also led to the prosecution and conviction of former President Luiz Inácio “Lula” da Silva, which rendered Lula ineligible to compete in the 2018 election. Moreover, Bolsonaro centered his campaign especially on a vigorous anticorruption discourse, promising to set a new standard of public integrity and to hold corrupt companies and politicians liable for their misconduct (see here and here). To be sure, Bolsonaro did not campaign exclusively on an anticorruption platform. He also positioned himself as the defender of more conservative social values and pledged to take a hardline approach to violent crime and drug trafficking. Yet his anticorruption rhetoric undoubtedly played a key role in his victory.

Even before the election, though, some commentators expressed skepticism that Bolsonaro would undertake genuine efforts to fight corruption and strengthen the institutions needed to promote integrity, and this skeptical view has been echoed by other commentators, both inside and outside of Brazil, during Bolsonaro’s first term (see, for example, here and here).

Now, one year since Bolsonaro’s electoral victory, is a suitable time to analyze the Bolsonaro Administration’s performance so far on anticorruption related issues. Have his substantive accomplishments in this area matched his tough rhetoric?

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Trump’s Attempted Violation of the Emoluments Clause, and the Inadequacy of the “Services at Cost” Rationale

In a press briefing on October 17, 2019, acting White House Chief of Staff Mick Mulvaney announced that the United States would host the 46th G-7 summit at the Trump National Doral Miami, a golf resort in Doral Florida owned by the Trump Organization. The announcement provoked widespread concern (see here and here) that this choice would violate the U.S. Constitution’s Foreign Emoluments Clause, which bars any person “holding any Office of Profit or Trust under [the United States]” from “accepting any present, emolument, office, or title, of any kind whatever, from any King, Prince, or foreign state,” as well as the Domestic Emoluments Clause, which bars the President from receiving any emolument, other than his salary, from the United States or any of the individual states. Following two days of complaints—not only from the ethics watchdogs and the President’s Democratic opponents, but also from some of his Republican allies—the White House abandoned the plan. So, the situation appears to have resolved itself. Nonetheless, the particular argument that Mulvaney advanced to defend against the anticipated Emoluments Clause complaints is worth considering—and debunking—lest this argument arise again in another context.

To be clear, the White House’s attempt to host the G-7 at a Trump Organization venue appears to be part of the same pattern of self-dealing that has already prompted multiple lawsuits against Trump for alleged violations of the Emoluments Clauses. As Mulvaney said on Fox News this past Sunday, “[President Trump] still considers himself to be in the hospitality business, and he saw an opportunity to take the biggest leaders from around the world and he wanted to put on the absolute best show.” Although the proposal to host the G-7 summit at the Doral resort was dropped, Mulvaney’s admission is worrying because there are reasons to suspect Trump chose the Doral property to benefit himself financially. (Consider the fact that in 2004, when the United States hosted the summit on Sea Island the organizers served 45,000 meals and paid the resort owners $3 million to reserve the entire property for 10 days.)

When Mulvaney detailed the White House’s decision-making process for the G-7 venue on October 17, he claimed the administration used neutral criteria when it made this choice (which is a bit hard to swallow given that Mulvaney stated the President suggested Doral), and that Doral was actually the best location (an assertion that is hard to assess without knowing the other venues the White House was considering). Furthermore, Mulvaney also argued that there was no Emoluments Clause violation because Doral would host the event “at cost”—that is, that Doral would only charge the government for the cost of the goods and services provided, and would not make a profit. On its face, this sounds plausible. After all, if Doral—and hence the Trump Organization—does not earn any profits on the G-7 meeting, but merely breaks even, then how can Trump have received an “emolument” from the U.S. government? If anything, the Trump Organization would have provided the U.S. government with a venue and associated amenities at a discounted rate.

Despite its superficial plausibility, there are three flaws with the argument that running the event “at cost” would eliminate any Emoluments Clause problem:

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