The sweater checks out for him being a good lecturer.

Every week, tons of speakers grace Columbia’s campus and make us all a bit smarter, which we chronicle in Bucket List. Corruption Cognoscente Amsal Lakhani went to “Maximizing Illicit Profits: Understanding How Corrupt Officials Choose How Much to Charge for Bribes,” on Thursday, and has a lot to say about it.

Thursday’s lecture was prefaced by a couple of introductions. Acronyms like CGEG (Center on Global Economic Governance) and CAPPI (Center for the Advancement of Public Integrity) were tossed around, in true Columbia fashion, before the main act, Professor Ben Olken of MIT, took the stage.

His lecture began with the question: why do we even care about corruption? The economist deals with the efficiency costs of corruption, and Professor Olken made it clear that he wasn’t dealing with moral issues in this lecture; rather, he was concerned with how corruption distorts the efficacy of government activity, and how it limits the government’s ability to combat inefficiency.

He then limited the scope of his lecture to three types of corruption: graft (theft of government funds), extortion (extracting money using threats), and bribes (taking money to turn a blind eye).

He first focused on the individual decision maker: do corrupt officials respond to incentives and punishments? To answer this question, Olken travelled to Indonesia. It turns out that graft in road projects is a huge problem there, as some Indonesian bureaucrats’ ingenious way of skimming off funds is to literally skim off the road. While the top layer looks as fresh as any newly-laid bed of asphalt does, the inside remains emptier in substance than your Lit Hum essay. This makes the road deteriorate much quicker, and as an economist would tell you, reduces the efficiency of road-building significantly.

So, Olken and his team of economist-engineer minions did a few things to figure out if and how corrupt officials respond to changes in policy. First, they picked villages slated to receive funds for a new road, and informed them that their village had been picked for an audit. They measured the amount of funds misallocated by building their own road and figuring out its composition, then taking samples of the concerned roads and comparing the two. Turns out, the control groups had approximately 28% of funds misallocated, while the audited roads had about 19% missing. While a 9% increase in efficiency is desirable, the fact that corruption still occurred when there was a 100% chance of being audited means that “the likelihood of punishment” is too low. Surely enough, the auditors couldn’t find any prosecutable evidence, only inaccuracies in the books and missing receipts, etc.

After having tried the stick, Olken moved on to the carrot. He did research on the very bastions of integrity, tax collectors in Pakistan. The government had realized that it was losing a lot of tax revenue to their decency-lined pockets. So Olken incentivized honesty. Tax collectors in the sample, in groups of three, would receive 30% of any tax revenue they collected. This meant that the going rate for bribes shot up, and like in most economic models, a higher price means lower quantity demanded. Indeed, total tax revenue from the sample went up by 9%.

So, while corrupt officials do respond to incentives, do markets of corruption operate like conventional market structures? The answer is yes. Olken ventured back to his time in Indonesia right after the 2004 tsunami. The government signed an agreement with the rebels at the time to remove a majority of checkpoints in a region to facilitate the re-building effort. So, the bribes that a trucker would have to pay at, say, 25 checkpoints, went down to bribes at only 5 checkpoints. As one would expect of a conventional market, as suppliers fall out of the market, the price of the service increases. However, Olken showed that the price increase, in total, was such that the amount truckers paid after it was less than they paid before. A corrupt market dominated by a few “firms” is preferable, in this case, to the more classical “many firms, low prices” situation.

Olken concluded that efficiency costs of corruption can be severe, particularly if they undo the government’s ability to correct externalities or distort investment decisions. He mentioned that corrupt officials do respond to monitoring and punishments, but there may be limits. Questions like “What if auditors are corrupt?” or “Could corruption substitute to other margins?” came up as a part of the conclusion of a talk that gave many in the room insights into the nuances of a fascinating underworld.

Olken and corruption via MIT and Shutterstock, respectively