Ebook How Corruption in Government Affects Public Welfare
Self-interest is commonly assumed to enhance prosperity because, like an invisible hand, competition leads suppliers to best serve those who demand their products and ensures that these products reach those who most value it. But this type of invisible hand may not exist when private actors deal with the government, request publicly controlled goods or supply products to the state. Quite the contrary, instead of a force that transforms self-interest into efficient outcomes, there may exist an invisible tripwire that topples all parties deeper into distress. Brock and Magee [1984] have introduced the term “invisible foot” for this effect of competition among self-seeking actors. Corruption is the most prominent reason why the exchange between government and its citizens may be a source of inefficiency — one which has been extensively studied of late.
Corruption, defined as the misuse of public power for private benefit, involves money changing hands. In some cases, the rich and corrupt become even richer at the expense of the honest and poor. There can be distributional consequences that trigger resentment in the majority of the population. But these distributional effects are not easily linked to public welfare as it is commonly defined by economists. There is a growing empirical literature based on comparative country studies, emphasizing that corruption lowers investment, capital productivity, capital inflows and many other macroeconomic data that are relevant to public welfare, [Lambsdorff 1999]. This study will review the theoretical causes for such an effect on public welfare. A brief review of the (neo-)classical arguments on corruption and welfare is given (section 2). But it is argued that the explanatory power of these arguments is limited. A principal agent model provides a better approach (section 3). Governments are commonly assigned the role of the principal in agency theory. Welfare losses result from the limited control and power of principals and because corruption constrains the contractual space and disallows agents to commit themselves to honest dealings. But this approach may have to be modified with competition for the principal’s position. Such competition may result in a principal striving for non-benevolent goals. Lacking a commitment to serve public interest, the principal may provoke X-inefficiency or cause the type of waste described by rent-seeking theory (section 4). The principal may even be part of the problem if it strives for its own corrupt goals (section 5). Besides allocative consequences such principals may be unable to credibly commit themselves. It will be concluded that depending on the role of government the adverse effects of corruption on welfare can be substantially different (section 6).
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Ebook How Corruption in Government Affects Public Welfare
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