Cecil Bohanon and John Horowitz: Exposing corruption and its influence drains its power

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Though there is limited empirical research on corruption, economists tend to analyze corruption from an individual cost-benefit perspective. The costs are the risk of the externally imposed legal punishment times the level of the punishment, along with the potential social shame and personal guilt suffered by the corrupt party. The benefits can be monetary or non-monetary.

The costs of being corrupt are higher when a person is more likely to be caught, and the penalties for corruption are more severe. The likelihood of being caught increases with more oversight, more monitoring and more effective anti-corruption efforts.

Interestingly, a recent study on corruption in American states suggests more isolated capital cities, such as Harrisburg, Pennsylvania, have more corruption. Media monitoring and reporting quality is also important, as is media bias. Larger penalties for corruption include longer prison sentences, more social disapproval and higher monetary penalties. Other research shows that officials benefit more from corruption when they have more discretionary power, such as when rules are more complex and less transparent.

What is considered corruption depends on the local culture and legal regime. In many countries, offering a nice lunch to restaurant inspectors is expected. In others, offering a gift to a judge during an adoption hearing is just considered good manners. Almost everywhere, blatant bribes are considered corrupt, but donations to elected officials’ campaigns or government officials’ favorite charities are often considered borderline.

In education, corruption might be manifested in falsely inflated student test scores. In a recent study from Romania, increased monitoring of students’ test-taking led to less cheating and lower test scores. Interestingly, the test scores of low-income students went down the most. In the Romanian case, there had been a culture of cheating in education. The public’s realization of how poorly schools were actually performing led to a public outcry that generated the political will to rectify the situation.

Some economists think bribery, fraud and illegally diverting governments funds are not the most critical issues in economic development. However, aid agencies often focus on ending bribery and theft because they fear donors will stop funding them when corruption is revealed. However, a common “remedy”—sending aid through the central government—might worsen the problem. Centralizing control makes a few agencies more powerful and often leads to more corruption.

Most economists agree that corruption is a problem as it subverts governing institutions. Reducing corruption is desirable but often difficult to accomplish.•

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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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