Corruption is often thought of in game theoretic terms – specifically, as a principal-agent problem.  It is also possible to think of corruption as a different type of problem in game theory – as a collective action problem.  In this conception, everyone agrees that it would be better if there were less corruption, but no one takes the first step because they would lose out more than everyone else.  It is individually rational to take or receive a bribe, and so it is hard to achieve the better, collective outcome.

Political science has identified one way that business interests sometimes resolve this problem, which essentially comes down to transaction costs.  I’ll explain how this works by starting with an example from U.S. politics.

It’s no secret that interest groups (like companies) lobby Congress for special treatment.  Seeking eased regulation or earmarked contracts is a very common form of rent-seeking in the United States.  Research has found that the cost-benefit analysis behind lobbying changes the more it takes place.  There comes a point in time at which there are so many tax loopholes, specific regulations, and earmarks, that the cost of having lawyers figure out the regulatory environment is greater than the benefit of any individual “rent.”  When these transaction costs get very high, interest groups will coordinate with each other to pass more comprehensive legislation that simplifies the rules.  For example, instead of everyone seeking individual tax loopholes, they will lobby to eliminate all loopholes and lower an overall tax rate.   

The same idea works in fighting corruption – specifically in companies dealing with bribes.  It’s preliminary, but some research indicates that when paying bribes to government officials becomes really expensive, firms will coordinate to lobby for the passage of anti-corruption legislation.  This works better – and can be assisted by the international community – when institutions (in this case, Chambers of Commerce) exist to foster information sharing between companies.  Jonathan Gans-Morse, in his article on property rights in Russia, indicates this logic of high transaction costs may have been at play in the reduction of private coercion.  The violence of 1990s capitalism in Russia got so bad that even businesspeople with mafia connections decided something needed to change. 

This likely works only in certain environments – where you have a relatively large and diverse group of firms in an industry, not when you have monopolies or oligopolies dominating commerce – but anti-corruption is an area where very few effective policy solutions have been found.  This one has promise because it involves coordination among relatively powerful economic interests – interests that governments listen to.

Transaction costs – any expense related to making an economic transaction.  The terms applies to everything from individual broker fees for making stock trades to the general “cost of doing business,” including the costs of regulation and corruption.  Their main feature is that these costs increase the more business you conduct – they are not fixed.

References:

• Gans-Morse, Jordan. 2012. “Threats to Property Rights in Russia: From Private Coercion to State Aggression.” Post-Soviet Affairs 28(3): 263-295.

For more information on rent-seeking and interest groups in U.S. politics, you can start with:

• Becker, G.S. 1983. “A Theory of Competition among Pressure Groups for Political Influence.” Quarterly Journal of Economics 98: 371-400.
• Mitchell, W. and M. Munger. 1991. “Economic Models of Interest Groups: An Introductory Survey.” American Journal of Political Science: 512-546.