Flat-Rate Corruption: Why is Bribery so Inelastic to the Severity of Violation?

• In Event: Corruption in the Public Sector

Abstract

A very common type of bribery arises when firms/citizens make illegal payments to government enforcers to get away with breaking the law. Anecdotal evidence and transaction-level datasets on bribery suggest that the size of the bribe increases very slowly with the degree of violation, especially in comparison with the official fines outlined in the law. This inelasticity means very low marginal cost to further infringement on regulations, which leads to rampant violation where corruption is present. Why is bribery so inelastic to the severity of the infraction? In this paper, I propose an opportunity cost story where government inspectors, under a time constraint, face a trade off between careful examination and bargaining with a violating firm/citizen and the number of victims they can harass. Using transaction-level data on bribery by traffic police in Indonesia and satellite rainfall data, I show evidence that exogenous increases in the inspector's fixed costs lead to a much stronger correlation between bribe size and the degree of violation. This result suggests that, even in the presence of corruption, incentive structures can be modified to strengthen regulatory compliance.

Author

• Ngoc Phan, Duke University