Abstract
This paper considers the possibility of collective action by the business community to counter corruption in the award of government licenses and contracts. The analogy is with contract enforcement institutions studied by economic historians and contract law scholars. The institution in this context comprises a no-bribery norm, a community system to detect violations, and a multilateral ostracism penalty upon conviction in a community tribunal. The requirements such an institution must meet if it is to be effective are analyzed. It is shown that an institution of sufficient quality -- combining probability of correct detection and severity of punishment -- can eliminate bribery. If the private institution is not sufficiently good, then in conjunction with the state's formal apparatus it reduces the level of bribes demanded, but increases the probability of winning the license or contract through bribery. An improvement in the government's formal anti-corruption mechanism, holding the private institution constant, reduces both the level of bribes and the probability of success through bribery. The two institutions together are shown to achieve substantially better outcomes than either can on its own.
Highlights
Corruption in dealings between business firms and government officials and politicians is a complex problem that needs to be tackled from multiple angles
At the points on or above it, the firm is willing to pay the bribes demanded by the bureaucrat, even at the risk of being detected and ostracized by the business community
The outcome B with no business institution that was derived in Figure 3 and is shown as the tangency of the two dashed curves.) Improvement of the business community institution reduces the magnitude of bribes the bureaucrats demand, but the chances of winning the license through bribery improve
Summary
Corruption in dealings between business firms and government officials and politicians is a complex problem that needs to be tackled from multiple angles. Since the winner of a license will need contact with many other members of the community of various essential purposes—supply, subcontracting, marketing, trade credit from other firms, longer-term credit from banks and other financial institutions, accounting services, and so on—a boycott from all or even many of these providers will severely reduce the values of the illicitly-won license and of future business opportunities. If this threat is sufficiently severe, winning the license by bribery becomes worthless.
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