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Grafting Loss Aversion

It would be fair to call corruption the single most important determinant of political fortunes in recent India. The party that rode to power by defining corruption a matter of absolute morality has now begun to appreciate it as a nuanced economic problem. The decision of the Delhi government to increase the salaries of their state legislators by 400% in order to ensure their unwavering scrupulousness, has been under intense scrutiny. It begs the question: do increases in public functionaries’ salaries truly inhibit corruption?

A new study under the LSE’s International Growth Centre, mentioned in The Economist, attempts to prove that it does not. Two American economists examined the effects of such a change in compensation in Ghana, where under a new directive salaries of the police force were doubled. They studied the frequency of bribes offered by lorry drivers- a common source of illegal income for the police- over long-distance journeys to neighbouring countries. The results of econometric analysis showed that after the new law, the level of corruption among the highway police increased by several measures: more roadblocks were erected, more lorry drivers were stopped with increased frequency, and more money was extracted.

This claim goes against the conventional viewpoint supported by different economic models. A discussion on them is too nuanced to be started here, but empirical data (see graph) of economic indices (per capita income of countries against their corruption index score) shows the strong relationship between low income and corruption.

Screen Shot 2016-02-16 at 18.52.21

Concepts from behavioural science may explain the strong correlation. Increased pay creates a sense of fairness in the minds of employees, and they are hence more likely to be virtuous simply out of reciprocity. Moreover, with increased salaries, employees less susceptible to moral hazard are likely to enter the workforce. As this new cohort reaches critical mass, social proof dictates a change in behavior in even the most unscrupulous among the old guard.

Most importantly, the concept of loss aversion may demonstrate why incentive-led measures are more often than not an effective anti-corruption tool. Every act of corruption has a built-in risk component: the payee charges the payer for the risk of facing legal penalty or even sudden unemployment. The alternative for the payer is to follow the official but usually circuitous route. Abrupt increases in salaries cause employees to suddenly feel loss averse- they now face the chance of losing a better-paying government service.

A closer reading of the LSE study may strengthen this argument. Of all the lorry drivers stopped by policemen, 19% were allowed to pass through without paying a bribe, an increase from 10% before the increase in salary. This reduction may arise from an increased risk averse attitude, as the frequency of asking for bribes is directly proportional to the probability of legal action against the policeman. The real risk of action also increases because of more perfect information: well-informed drivers may not only bargain harder to escape paying an illegal fine, but also threaten the police with a complaint to superior officers.


Economists- as is their wont- will attempt to box corruption into a predictive model. Robert Klitgaard had famously concluded C=M+D-A (corruption equals monopoly plus discretion minus accountability). It is nevertheless an issue with many causal components- several theories from policy, economics and ethics may prove why Ghana policemen defied the conventional view. It may be important to note that law enforcement in Ghana has historically been the least well-paid of all government departments- and the compensatory catching-up under the new directive may not have rid the police force of its reference bias as well as a historical feeling of unfairness. Additionally, in light of an enhancement in social and financial stature, pressures from superior non-field police officers for their ‘cut’, or from demands by family and friends, may also cause redistributive pressure and an increased graft appetite on part of the highway police.

Finally, in the absence of a concurrent advent of effective anti-corruption laws, their strict implementation and a substantial increase in the number of convictions- which was the case in Ghana- increased incentives will not have the desired effects in abetting corrupt behaviour. As is the case with several policies dealing with human behaviour, liberal, incentivising legislation must be complemented by unflinching tough love by the executive.

Images Source: Own work. Fair use.

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