Corruption as a Principal-Agent Problem

The economic literature treats corruption as essentially a principal-agent problem (Jain, 1998; Groenendijk, 1997; Rose-Ackerman, 1999; Shleifer & Vishny, 1993). In the government, the fundamental dilemma comes from the fact that the principal (the citizens who pay taxes for public services) is not the one who decides on the way the money that is collected will be spent. In a representative democracy, the elected officials and managers of public agencies decide on the allocation of scarce public resources. In other words, the populace appoints the government officials as their agents to set public policies and manage the economy. As Shleifer and Vishny (1993, p. 559) contend, the principal-agent problem arises when “the corrupt official has some effective property rights over the government good he is allocating.”

Agency theory assumes that the interests of principals and agents diverge. The principals expect the agents to work in furtherance of their interests and maximize the general welfare of the country. The agents, being rational utility maximizers, face strong incentives to increase their own welfare at the expense of the principals. According to agency theory, there are information asymmetries to the advantage of the agents, who have much more information about the policy process than principals do. Moreover, it is costly for the principal to monitor the behavior of the agents. Thus, agency problems are attributed to the fundamental information asymmetries, which in turn are the result of the inability of principals to monitor the behavior of the agents.

To avoid, or at least minimize, moral hazard on the part of the agents, the principals impose constraints. In sum, agency theory seeks to understand what structure of incentives will motivate the agents to be honest. Such incentives might include higher wages, indoctrination, accounting systems that make it harder to steal from the government, as well as injecting competition in the provision of government goods and services since the secrecy associated with corruption requires keeping the system relatively closed and involving only a small number of participants (Bardhan, 2006; Shleifer & Vishny, 1993; Van Rijckeghem & Weder, 2001).

Corruption through the Lenses of Democratic Theory

From the perspective of democratic theory, corruption does more than violate the fiduciary obligations with which the public entrusts government officials; it has detrimental effects on the legitimacy of the democratic process as a whole. Warren (2004 2006) contends that corruption should be understood as a violation of the democratic norm of inclusion. If citizens view their government as corrupt and dishonest, they become cynical about political life and as a result they are less likely to participate in democratic governance (Kostadinova, 2012). Villoria et al. (2012, p. 85) warn that corruption “may lead citizens to distrust government institutions, to distrust each other, and to be less willing to follow rules and obey laws.”

Svolik (2013) argues that this is especially true for countries making the transition to democracy, where citizens' disappointment with corrupt officials turns into dissatisfaction with democracy as a political system. The change of political system brings a new wave of politicians, who are largely unknown to the public. Since the majority of candidates for office in nascent democracies have no established reputations, it is easier for opportunistic candidates to enter into politics and use the office for personal gain. After witnessing such instances multiple times, explains Svolik, voters conclude that “all politicians are crooks” and as a result lower their expectations for politicians, who in turn respond to these negative expectations by “acting like crooks” (p. 686).

The situation reflects a vicious cycle where dissatisfaction with corrupt officials results in a deep disappointment with the system, which leads to low expectations for accountability on the part of citizens and a lack of delivery on the part of politicians. Seeing no real improvement in their political and economic well-being, citizens gradually remove themselves from politics, a situation that reinforces Warren's argument (2004) that government corruption violates the democratic norms of inclusion and disempowers citizens. As recent history suggests, such popular disillusionment with democracy as a political system can lead to democratic backsliding and reversals to autocracy.

In the case of new democracies, the solutions offered by democratic theory lie in the area of gradual improvement of politicians' reputation and performance through the strengthening of the institutions that are able to limit the entry of bad politicians, such as political parties, the news media, and civil society. In the case of consolidated democracies, scholars recommend even further tightening of ethical standards to which government officials should be held. Arguing that representatives are responsible not only for their actual behavior but also for how their acts appear to citizens, Warren (2006) provides theoretical backing for regulating the appearances of corruption. Public officials, whose behavior appears improper, even though not illegal, should be at risk of losing their posts. The bans and limitations on gift receiving enacted by many states in the United States are an example of the attempt to impose more stringent standards to which elected representatives and state employees will be held (table 6.2).

Source: National Conference of State Legislators (March 2013).

Corruption as a Social Construction

For social constructivists, corruption cannot be understood in isolation from the social, cultural, and historical context in which actors and institutions operate. Judgments of corruption are socially constructed, meaning that they depend on local standards of what is agreed on within a given social group. The appropriateness of an act is interpreted in different ways depending on the circumstances and the meaning attached to it. Groenendijk (1997) provides an example of how the act of taking public resources for private use can be viewed as stealing at one place, while at others, these resources are considered perks that come as compensation for the low wages paid by the employers. However, the frequently informal nature of such approaches often makes the line between acceptable and corrupt practice a very difficult one to draw, even in situations where the notion of perks gains some measure of acceptance.

Not only are some societies more tolerant of corruption than others, but in extreme cases, corrupt behavior can become the norm. This often is what scholars call systemic corruption (Misangyi, Weaver, & Elms, 2008; Persson, Rothstein, & Teorell, 2013). Moreover, they argue that societies with systemic corruption face a collective action problem, where there are no incorrupt principals to monitor and sanction the corrupt agents. In this sense, the cost of not being corrupt is too high to limit its prevalence. The research on endemic corruption suggests that reducing corruption requires dramatic, sometimes revolutionary change in institutions (Diamond, 2007) and the massive reform of virtually all political, economic, and social institutions. This stream of research takes into account macrosociological contexts and underlines the importance of identities and roles. Overcoming the collective action problem requires a major change in norms and expectations. Research points out that often such successful transformations are led from the top, when high-level public officials set new standards and serve as role models for the populations (Persson et al., 2013). In this regard, the framing of issues is crucial in fighting corruption in terms of both constructing new anticorrupt identities and practices as well as motivating the populace to follow the new standards (Misangyi et al., 2008). The cases of Hong Kong and Singapore are examples of such massive reforms initiated and facilitated by the countries' political elites.

Bad Apples Theory, or Corruption as a Trait

Since corruption is a willful act conducted by a particular individual, a long tradition relates the problem to the characteristics of individuals. This bad apples argument links corrupt behavior to personal traits and the lack of moral character (Trevino & Youngblood, 1990). This stream of research studies the behavior of individuals in ethical dilemma situations. Some of the findings show that individuals with greater internal locus of control (versus external locus of control) and those with higher levels of cognitive moral development tend to be more ethical (Trevino & Youngblood, 1990). Besides the individual differences and the ways they perceive moral dilemmas, ethical behavior is also related to the organization's system of rewards and punishments. Trevino and Youngblood (1990) find that rewarding ethical behavior is more effective than punishing unethical behavior, with mild punishments having no discernible effect. Expectedly, the solutions to corruption offered by these studies lie predominantly in the recruitment, selection, and training of personnel. Organizations should strive to attract people with high moral standards. Managers should be assessed based on their levels of cognitive moral development and the presence of internal locus of control. In addition, these traits also could be developed through training.

In a related line of research, some studies ask if corruptibility is a personal trait or a situational attribute. A study examining the behavior of street-level bureaucrats in four eastern European countries (Miller, 2006) argues that officials in these countries should be viewed as being corruptible rather than corrupt. When asked, officials and citizens alike condemn corrupt behaviors and claim that the use of bribes is against their internal values. Yet both engage in corrupt acts in particular situations. According to Miller (2006), corruptibility does not come from the person's lack of moral character. Rather, it is an attribute of the situations, where the interaction is private, the client has a lot at stake, and the official is given broad discretion to decide the outcome. In this sense, the solution to corrupt behavior should not be focused on reducing the “bad apples,” but rather on reducing the situations that encourage corruptibility and thus corrupt behavior.

Prior scholarship provided multiple approaches (summarized in table 6.1), all of which address important parts of the corruption phenomenon. It seems, though, that none of the perspectives alone can completely explain corruption or offer a set of comprehensive solutions. In this sense, there is a need for an integrative multidisciplinary approach toward the issues of corruption and an understanding that there is no universal solution.

The Role of Macroeconomic Arrangements

The research consistently reports that democracies as a class are less corrupt than autocracies, yet some democracies are more corrupt than others. Exposure to democracy, it is argued, has gradual effects on reducing corruption. Treisman (2000) shows that the age of a democracy is a major determinant of corruption—the older and more established the democratic system in a country, the lower the level of corruption. Keefer (2007) explains the differences in performance between younger and older democracies in terms of the political credibility of preelectoral promises of candidates for office. In younger democracies, argues Keefer, politicians can make credible promises only to small parts of society, resulting in client-responsive policies characterized by “high targeted government spending, high rent seeking, and low public good provision” (p. 805). Similarly, Svolik (2013) argues that new democracies are more likely to see rent-seeking officials because the majority of politicians have no prior reputations, citizens lack democratic experience, and the institutions that can potentially filter out undesirable candidates for office, such as political parties, the media, and courts, are underdeveloped.

Yet the success of democratic systems is strongly dependent on the strength of the country's economy. Democracies backslide most often in times of economic instability (O'Donnell, 1973; Svolik, 2013). Moreover, economic development is one of the strongest and most consistent predictors of the level of corruption in a country (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999, Treisman, 2007). Richer countries experience lower levels of corruption, measured by both perception indexes and experience-based indicators. The effect on the level of the economic development has been found to be significant across multiple studies, and the negative relationship with corruption has been particularly robust.

The Role of Political Institutions

Scholars have also examined the effect of specific political institutions while controlling for the level of democratization and economic development, including the types of electoral arrangements, the degree of decentralization, and whether the system is presidential or parliamentary. Yet the evidence on the effects of the majority of these factors has been inconclusive. Some scholars have argued that federalist and presidential countries create competitive environments that reduce corruption. Others have contended that such systems produce more veto points and institutions with overlapping mandates and thus make it harder for citizens to monitor the performance of institutions, which in turn allows greater levels of corruption (Gerring & Thacker, 2004; Kunicova & Rose-Ackerman, 2005). Retesting the relationship with more recent data, Treisman (2007) finds presidential systems to be significantly related to higher corruption, albeit the association is not particularly robust. Scholars have also hypothesized that systems encouraging personal votes (majoritarian or open-list proportional systems) lead to less corruption, yet again, the evidence is rather inconclusive.

Most recently, scholars have moved away from testing the effects of single factors to considering more complex concepts such as the clarity-of-responsibility concept, developed by Powell (2000). The term depicts the extent to which institutions function as instruments of democracy and the degree to which they allow citizens to influence policies that affect their lives. High clarity of responsibility makes it easier for voters to identify bad rulers and vote them out of office. Tavits (2007) applies the clarity-of-responsibility concept (indicators include majority status of the government, cabinet duration and stability, opposition influence on the policymaking process, party fragmentation) to explain the difference in corruption among countries and finds a strong association: countries with clear chains of responsibility are less corrupt.

The Role of External Control Mechanisms

The evidence about the role of external control mechanisms such as freedom of the press in deterring corruption has been fairly consistent. The presence of an independent press helps expose corrupt officials and thus serves as an important external control of corruption (Brunetti & Weder 2003; Treisman, 2007). By contrast, the absence of a free press has typically been found to lead to higher levels of rent-seeking ruling elites (Sunstein, 1995).

An independent judicial system can be an effective mechanism for deterring corruption by punishing corrupt government officials. The judiciary plays an important role in ensuring that the legislative or executive branches of government do not overstep their boundaries, but even more important is the role of the judiciary in terms of combating corruption. Without exception, in countries where corruption is most prevalent, the judiciary is almost always corrupt or weak. The evidence is consistent with the notion that independent courts play a critical role in limiting corruption and protecting democratic rules from short-term shocks that entrepreneurial ruling elites may use to enhance their power-base (Gibler & Randanzzo, 2011).

The presence of a strong and vital civil society is heavily emphasized in current anticorruption policies. Yet civil society organization can also contribute to a higher level of corruption and can serve as an institutionalized mechanism for corruption, as has been the case in some eastern European countries and former Soviet republics. A recent study by Themudo (2013) finds that civil society strength is in fact negatively associated with the level of corruption. However, it may be that the effect of civil society on corruption is dependent on freedom of press. Indeed, the impact of civil society, according to Themudo, depends on its ability to generate public pressure through the news media. Thus, civil society organizations are most effective when they can expose cases of corruption in countries with a free press. The level of professionalization of civil society organizations may also be an important factor in terms of their effectiveness in combating corruption.

The Role of Bureaucratic Professionalization

Fukuyama (2013) suggests that the quality of executive branch governance is determined by two dimensions: bureaucratic capacity, which reflects the degree of professionalization of government officials, and bureaucratic autonomy, which refers to the amount of discretion delegated to the national bureaucracy. The two dimensions are not fixed, and the quality of government is a result of their interaction. The optimal level of autonomy of a country's bureaucracy depends on the level of bureaucratic professionalization. Highly professional administrations can be trusted with greater discretion since they are more likely to be guided by internal norms and broad public goals rather than by the short-term benefits of corruption. In contrast, bureaucracies that are filled with political appointees must be closely controlled, and thus kept less autonomous, since they are not socialized to broader professional norms and are more likely to engage in corrupt exchanges.

Bureaucratic structure based on Weberian principles has been widely recognized as an important foundation of capitalist growth. In a seminal study, Evans and Rauch (1999) find that public agencies that are characterized by meritocratic recruitment and promotion and offer predictable long-term careers can promote economic development. The authors contend that the causal mechanism is the enhanced integrity of civil servants that comes with professionalization. “Bureaucrats who see themselves as having joined their confreres in office by virtue of sharing similar abilities are more likely to internalize shared norms and goals than are those who know they owe their office to the favor of a particular kinsman or patron. Identification with colleagues and the organization itself should also create internalized intangible costs for corrupt activities that subvert organizational goals and increase the effectiveness of monitoring” (Evans & Rauch 1999, p. 752).

In a similar vein, Neshkova and Kostadinova (2012) inquire whether the recent administrative reforms in eastern Europe, which share the common goals of depoliticization of personnel policies and professionalization of administration, have had any bearing on the level of corruption in these countries. They hypothesize that the establishment of a meritocratic principle of recruitment and promotion, combined with the prospect of long-term careers based on individual competence and performance, would discredit the short-term benefits of corrupt practices. Consistent with these expectations, the evidence indicates that civil service reforms, aimed at the establishment of impartial and professional public administrations, are likely to reduce corruption.

Having professional bureaucracies appears to be even more important, given the findings of a recent study differentiating between administrative and political corruption and their consequences. Drawing on recent outbreaks of corruption in Spain, Villoria et al. (2012) find that citizens perceive bureaucratic corruption as being equally as detrimental as political corruption, and maybe more so. Yet both types of corruption damage the legitimacy of government, increase the mistrust toward government institutions, and lower the level of satisfaction with democracy.

Procedural Factors to Encourage Responsive, Accountable, and Transparent Government

Governments around the world, and especially in more highly developed democratic settings, have adopted myriad procedural arrangements to combat corruption and encourage ethically responsive conduct and accountability by public employees and officials. In general, procedural approaches to maintaining ethically responsive and accountable behavior tend to fall into two very broad categories: ensuring the availability of full and adequate information on governmental activities in order to enable the citizenry to exercise effective oversight over public officials and government employees and the regulation of the individual behavior of public officials and governmental employees.

The first category includes establishing such procedural arrangements as implementing open records laws, requiring of open meetings, holding public hearings generally (and especially on governmental budgets), and providing extensive, relevant documentary information to enable the citizenry to accurately assess the activities of their government and those who represent them. The second one includes making governmental statutes, regulations, and rules readily available to all citizens and providing clear and extensive written information about proposed new laws and budgets, as well as the activities and programs of government and the organization and delivery of services.

Of particular importance is the availability of regular, understandable, and highly specific information on government financial transactions. While many, if not most, of these practices have been in use for some time in well-established democracies, many are relatively new, and in more than a few cases, they still do not exist in countries making the transition to democracy. Indeed, in most transitional countries, traditional practice normally has been to keep information about the implementation of government activities and programs quite secret—the opposite of making information about government readily accessible to the public.

Consequently, many international organizations have placed increasing emphasis on encouraging the adoption of procedures that make governmental information much more available in countries making the transition to democracy and market economies as a means of promoting more responsiveness on the part of government agencies and their employees. For example, the US Agency for International Development and the World Bank have worked in many parts of the world to encourage the introduction of public hearings and other forms of citizen participation in budgetary processes at all levels of government, especially at the municipal level. In at least some instances, these agencies have made efforts to go a significant step further and introduce open records laws that require many of a government's written documents—ranging from an individual's personal notes of a meeting to formal government records (generally with the exception of individual personnel records)—to be open to the scrutiny of the public and the news media.

A perhaps less radical approach to making adequate information available to the public is institutionalizing various kinds of administrative procedures that ensure the extensiveness and adequacy of the information that will be produced by government agencies. The introduction of management information, performance measurement and planning, and program budgeting systems can all contribute significantly to making more extensive governmental information available, enabling the citizenry to more effectively evaluate both the performance, and, in many instances, the integrity and accountability of their government officials. Various innovations such as making available better and more detailed agency reports and informational documents can be helpful, especially in institutions where either the local media or nongovernmental organization have developed some level of investigative capacity. The use of various technologies, such as the establishment of web pages and, in some cases, making information about government contracts available over the Internet, can contribute to establishing procedures that ensure the openness, and thus the responsiveness, of government performance. They thus help to encourage, if not ensure, the ethical behavior of those whose job is to serve and represent the public.

Equally important in efforts to combat corruption is the establishment of procedures and processes that ensure that when there is a question about the ethical behavior of government officials and public employees, adequate investigations can occur. Governments around the world have taken many different approaches to dealing with such matters. These include the establishment of internal and external audit arrangements, the conduct of legislative oversight activity, and the requirement of direct executive responsibility for government performance.

Institutional Factors to Encourage Responsive, Accountable, and Transparent Government

Without question, the most important structural arrangement helping to ensure responsive government is the separation of government into different branches and levels in such a manner as to disperse power and authority. As the nineteenth-century British political analyst, Lord Acton, commented, “Power corrupts, absolute power corrupts absolutely.” Consequently, dispersing the ability to control government activity, and especially the allocation and disbursement of public funds and other financial activity among different individuals in different units of government, can be a critical factor in discouraging corrupt behavior and ensuring accountable government. Such arrangements significantly limit the possibilities for the monopolization of power and provide a critical opportunity to encourage checks and balances among branches and levels of government. A system of multiple branches of government also requires making available the information among branches, which also helps to ensure ethical, open, effective, and transparent government. Of particular importance, it encourages the responsiveness of government bureaucracies, and the people who staff them, by holding them accountable, at least in terms of policy and its implementation, to the legislative branch and the chief executive of the government.

Also of note is the fact that many established democratic governments, and particularly those that are well known for the responsiveness and integrity in government performance, rely heavily on the decentralization of governmental institutions. Especially notable in this regard are the Scandinavian countries and the United States, where a high proportion of governmental expenditures occurs at the subnational level, thus providing citizens with the possibility to more closely understand the activities and workings of their government. This allows individuals to have a closer relationship with, and a better sense of, the people who are working in the government that is closest to them, as well as to more easily understand and gain access to information about government and its programs.

Many democratic governments also have established and rely heavily on institutional arrangements that provide extraordinary institutional oversight of governmental activities. The Scandinavian countries introduced the institution of the ombudsperson, a highly independent government official who has extraordinary investigative powers to determine that governmental agencies are acting appropriately in terms of both responsiveness to the citizenry and integrity. In the United States at the national level, individual government agencies house an office of inspector general. These units are given extraordinary powers and authority to investigate the normal operations of the government agencies of which they are a part in order to ensure the highest levels of professional responsibility and integrity. Many state and local governments have also established similar offices.

Also important in this regard is the authority given to legislative branches, as well as judicial branches through grand juries, to carry out their investigative activities unimpeded by the executive branch of government. Often when legislative branches (usually through their committees) are given significant oversight authority, they have various important resources that enable them to engage in thorough, independent investigations of the responsiveness of and integrity of the activities of the executive branch and its agencies. They frequently possess expert staff, and in many cases, they have subpoena power, which enables them to compel testimony from members of the executive branch on threat of imprisonment. In addition, many legislative branches establish specific agencies designed to exercise direct oversight over the executive branch. Some of these agencies focus principally on issues of financial management and auditing; in other cases, their authority is much more wide ranging and places special emphasis on the responsiveness of public administrators.

Other structural arrangements established in democratic governments encourage ethical, open, accountable, and responsive government. These include, for example, a variety of institutional arrangements that directly involve private citizens in the operation and practice of government. Thus, many Western democracies (especially the United States) rely heavily on citizen boards to advise, oversee, and, in some cases, make critical policy decisions for government agencies. These boards often have access to trained staff and have varying levels of legal authority to require the provision of information by the staff of the government agencies they oversee or advise. The use of such boards enables citizens to gain better access to information as well as to develop expertise in the area of policy for which the board is responsible. It also enables them to hold nonresponsive agencies much more accountable and, in so doing, encourage and support the ethical behavior of public authorities.

Other kinds of institutional arrangements have also been established to facilitate responsive government. For example, in the United States, especially at the local level, many governments have arrangements whereby individual citizens can initiate the removal of public officials from office by obtaining a designated number of signatures on a petition. This results in the conduct of recall elections, in which if the electorate approves, the individual officeholder is removed from government prior to the conclusion of his or her term. In other communities, the participation of political parties in local elections is forbidden as a means of encouraging ethical accountability and responsiveness by limiting the potential for corruption that comes from intense party competition for the control of patronage (e.g., jobs and government contracts). In some Western democracies, a high reliance is placed on the use of professional managers in local (and, to a lesser extent, national) government as another way of encouraging responsive, noncorrupt government and lessening the potentially corrupting influence of intense political competition.

Creating a Culture That Supports Responsive, Accountable, and Transparent Government

Procedures established by government sometimes can be easily changed or manipulated. Likewise, institutional structures can, in some instances, be significantly altered, especially in newer or more fragile democracies. Consequently, the traditions, values, and cultural norms of a society represent a very important, perhaps the most important, means of sustaining the procedures and structures that ensure responsive, accountable, honest, and open government. Certainly one of the key factors promoting honest, responsive, and accountable government in many Western democracies is the tradition of a free, open, and effective press. It is arguable that the existence of a strong investigative media may represent the most important force for encouraging and preserving integrity and responsive behavior in government. Although media are frequently attacked and criticized by government officials for being biased, media investigation in most democratic societies is an extraordinarily important force in the promotion of responsiveness and honesty in government. However, it is critical that governments have constitutional or statutory protection for individuals in the media who call attention to unresponsive or inappropriate behavior on the part of those within government.

Another key factor in many democratic societies, especially in the United States, is the general approach that is taken to educating and socializing those who work in government. In the United States, great emphasis has been placed on the notion of the person working in government being a public servant. In that sense, each government employee is held to be responsible and accountable to the citizenry for the highest standards of performance and ethics. Much effort is made in educating those who will go into government and the citizenry of the country, to ensure a widespread consensus that public officials must be responsive to the citizenry and held accountable for high standards of integrity. In that sense, the culture of government, as well as the expectations of society (reflected in both public attitudes and professional norms), places great emphasis on maintaining high levels of integrity and responsiveness on the part of governmental employees.

Another set of cultural factors that can contribute in important ways to encouraging an honest, responsive, and accountable government is long-term political and economic stability combined within active civil society. A reasonable degree of stability and adequate funding of government is also important. Stability facilitates the establishment of strong norms and expectations for individual performance. Similarly, the existence of an energetic civil society, which demands honesty and responsiveness on the part of government officials, is a critical factor in promoting governmental integrity and accountability.

In a number of Western democracies, and especially in the United States, many nonprofit organizations and civic groups employ individuals who become expert in particular areas of public policy and governmental activities. These individuals, through their investigative skill, represent an important check on the potential for corrupt and nonresponsive behavior by government agencies and officials. Many such organizations take great pride in their capacity to investigate the activities of government officials and serve as watchdogs over government agencies.