Critically Compare The Institutional Economics.

Introduction

Corruption has become an important area of study in the social sciences, with one predominant question relating to causes of corruption. What causes corruption has been explained by different approaches to corruption studies (Della Porta & Vannucci, 2016). What is also interesting is that literature also suggests that any attempt at describing causes of corruption from a unidimensional perspective of a specific theory is fraught with errors because no one approach or theory can describe all the causes of corruption (Graaf, et al., 2010, p. 13). This is so because corruption as a behaviour involves many varieties and there is no one kind or variety of corruption (Graaf, et al., 2010).

It may also be said that while the opportunities of corruption may exist everywhere, the degrees may vary and all individuals, organisations, public servants, and administrative cultures may not respond to opportunities of corruption in the same way (Caiden, et al., 2001). In that sense, explaining the cause of corruption becomes difficult from the perspective of any one theoretical perspective and in this would be a limitation of both approaches considered in this essay that neither of these two approaches can completely answer to the causes of corruption.

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Another important point is that corruption is caused by a multitude of factors, these including social, economic and political to name a few factors (Fijnaut & Huberts, 2002). Some of these causes may be external to the actor, that is, contained in the environmental conditions, while others may be internal to the actor, that is contained in the psychological make up or the rational decision making of the actor himself. In a particular case of corruption, there may be a combination of these factors, which may lead to issues of whether corruption is caused by determinism or free will of the actor (Graaf, et al., 2010, p. 14). Just like there is no “univocal recipe to deal with anti-bribery measures, since corruption is a complex and multifaceted phenomenon” (Vannucci, 2015, p. 3); there is no univocal description of the causes of corruption. Again, no one approach or theory may be able to completely explain why a particular case of corruption occurred.

Keeping the above limitations of corruption theories in mind, this essay critically and comparatively considers two theoretical approaches to explaining the causes of corruption with the purpose of assessing which of these two theories, these being institutional economics and neo institutional approaches to corruption, explains the causes of corruption in a more effective manner. The institutional approach to corruption is based on the premise that institutional power over economic resources and transactions leads to corrupt behaviour. The neo institutional economics approach has been critical of institutionalist approach to corruption and although based on the rational choice framework, it departs significantly from the institutional economics approach.

Those who adhere to the institutional economics theoretical framework for explaining the causes of corruption take as their starting point the rational choice made by the individuals to commit a corrupt act for it is the most profitable course of action with desirable outcomes for the individuals (Rose-Ackerman, 2010; Lambsdorff, 2007; Lambsdorff, et al., 2004). The neo institutional approach argues that causes of corruption are not always exogenous and may also be endogenous.

This essay will argue that the neo institutional approach is more relevant to explaining corruption as compared to institutional economics approach, because it is able to explain the causes of corruption not in a limited context of the focus on individual, but can also explain the causes of corruption from a wider perspective of the institutional conditions and behaviour of other individuals. This is useful in explaining the causes of corruption in the context of developing countries as well.

Institutional Economics Approach to Corruption

Institutional economics theory is the dominant paradigm in the field of study of causes of corruption and has been so since the time academicians started taking greater interest in the causes of corruption (Hellmann, 2017). Institutional economics framework is based on the more conventional rational choice model in which the incidence of corruption is explained on the basis of the principal and agent problem (Hellmann, 2017). The premise on which institutional economics approach is based is that the agent makes a rational choice to be corrupt because he is driven by self-interest to maximise his or her own payoff from corrupt behaviour (Hellmann, 2017).

The institutional economics approach to corruption is based on the ways in which institutional context affects the behaviour of individuals (Rose-Ackerman, 2010). This approach considers how institutional incentives affect the behaviour of the individuals and how corruption is affected by this (Rose-Ackerman, 2010). The focus of the institutional economics approach is to highlight the effect of bribery on the efficiency and fairness of public sector (Rose-Ackerman, 2010).

Based on the rational choice model, institutional economics approach argues that corrupt acts occur when rationally acting agents decide that the potential profit in engaging in corruption outweighs the risk. To explain the institutional approach further, reference may be made to the public choice theory, which looks at the independent variables to explain individual corruption. As per the public choice theory, the causal chain is made of an individual making a rational decision and the predetermined outcome of that decision. At the core of this public choice theory is the public official or an individual corrupt official who makes the rational decision with the aim of maximising some benefit to himself.

In Rose-Ackerman’s words, the utility of the institutional economics approach to corruption is that “one can make substantial progress with models that take tastes and values as given and perceive individuals as rational beings attempting to further their own self-interest in a world of scarce resources” (Rose-Ackerman, 1978, p. 4). Another statement made by Rose-Ackerman (2010) is that “corruption occurs when private wealth and public power overlap” (p.47). To juxtaposition these two statements made by Rose-Ackerman (1978;2010), it is indicated that the causes of corruption are rooted in the individual’s actions in the furtherance of self-interest. Another important point made in the latter statement is with respect to public power, which indicates that corruption is seen from a restricted point of view of public corruption or corruption by a public official. This point may be taken first for consideration. (Reference) who is Juxta ?

The institutional economics framework is largely based on the conceptualisation of corruption from a public aspect, where corruption is also described in the form of actors, these being bureaucratic officials, government ministers, and public servants (Rose-Ackerman, 2010, p. 48). This is also clear in the way corruption is defined as a “violation of an obligation or a duty for a private gain” (Rose-Ackerman, 2010, p. 48). This is the starting point of conceptualising corruption within the institutional economics framework as explained by Rose-Ackerman (2010); however, its limitation is that the premise is faulty as corruption is not just public in nature, it may also occur at the level of the private corporate sector as well (Rothstein, 2011).

To be sure, Rose-Ackerman (2010) does admit to the corporate level corruption and criticises the restrictive approach to conceptualisation of corruption. However, she does base the understanding of corruption firmly within institutional framework and the principal-agent context, which sees the corrupt individual as someone who takes advantage of the gaps in the institutional framework to commit corrupt acts (Rose-Ackerman, 2010, p. 49). In so doing, she argues that principals incentivise agents to corruption and create a three pronged nature of transactions between principals, public agents and outsiders in a way that principal/agency relations pervade government. In turn, the institutional set up within the government also allows public servants to commit corrupt acts as rational beings who can calculate the outcomes in terms of gains and costs of committing the corrupt acts (Rose-Ackerman, 2010).

Thus, the public choice theory, and ultimately the rational choice theory portrays the individual as a rationally calculating person who makes the decision to commit a corrupt act based upon a calculated approach which sees the expected advantages of the outcomes of the act to outweigh expected disadvantages (Rose-Ackerman, 2010). The premise of this approach is that the individual is in a position to understand what the expected outcomes of his corrupt actions will be and decides to commit the corrupt action because rationally he believes that his actions will yield more benefit to himself at a lower cost or penalty.

The institutional approach argues that the individual is encouraged to be corrupt by the prevalence of certain institutional factors, such as, the lax institutional framework within which the benefits of corruption exceed the costs, as there is lesser likelihood of being caught (Rose-Ackerman, 2010). This adds to the rational choice model that is advanced by institutional theory wherein the individual has before him a choice to be corrupt or not be corrupt based on the outcomes for him. If the outcomes of such corruption is some penalty that is institutionally prescribed, which far outweighs the benefit that he may derive from his corrupt acts, then the individual may choose to not be corrupt.

The drawback of the rational choice approach within the institutional economic approach is that it puts the entire onus of corruption and making the corrupt decision on the individual. The individual is seen as someone who is always in control of his choices and being in such control, he makes the decision to become corrupt. This approach fails to consider the ways in which individuals may be made to make corrupt choices not because of their own rational decisions, but because of certain conditions that may be outside their control. On the other hand, individual behaviour may also be explained by reference to the causes of corruption that are beyond the control of the individual.

Neo institutional approaches to Corruption

The institutional economics approach is based on the conventional rational choice model, which focuses on the principal-agent problem. This is different from the neo institutional approach to corruption, which is based on the acceptance of the importance of all kinds of formal and informal constraints that the institutional setting places upon the individuals and the effect of the same on the tendency of corruption for the individuals (Lambsdorff, Taube, & Schramm, 2004). Neo institutional approach to understanding corruption is a critique of institutional economics approach and was developed to point out the shortcomings of the institutional economics approach. The neo institutional approach to corruption proceeds on the same premise as institutional economics approach, that is, rational choice of individual agents; however, the important point of departure for the neo institutional approach is that it does not limit itself to the point that institutional economics approach makes, which is that preferences being pursued by individuals are exogenously given (Hellmann, 2017). In other words, neo institutional approach does not believe or argue that corruption is only caused by the drive towards self-interest maximisation, rather, it may also be caused or determined by endogenous factors, such as, the behaviour of other individuals. Thus, there is a focus on the interactions between individuals for the purpose of determining causes of corruption that are endogenously determined.

The neo institutional approach emphasises on collective settings for understanding the preferences and actions of individuals. March and Olsen (2010) argue that individuals follow the rules that they consider legitimate in the context of the shared understanding with other actors on the rightness and goodness of these rules. As per this approach, actors in deciding whether or not to follow a particular action do not only consider the outcomes of that action in terms of net benefit, but also the logic of appropriateness of the action (March & Olsen, 2010 ). Appropriateness of actions are determined in this context as per the collective institutionalised practices and standards (March & Olsen, 2010 ). Actors make decisions to act in a corrupt manner when institutions leave gaps in understanding around what constitutes inappropriate actions (March & Olsen, 2010 ).

A neo institutional in this context, considers the mechanisms which are institutional and which affect individuals’ beliefs and preferences by allowing social interactions within corrupt networks allowed in institutional context (Vannucci, 2015). These interactions can occur within the paradigms of informal, non-written rules, contractual provisos and conventions within the institutional set up and which may lead to the gaps that allow corrupt practices by agents (Vannucci, 2015). These informal and non-written rules may also lead to the formulation of a certain kind of organisational texture which accepts corruption, and leads to the further development of informal codes and governance structures that go on to provide internal stability and enforcement mechanisms that support corrupt and illegal activities in specific areas of public activity (Vannucci, 2015). Eventually, the formulation of the informal codes also lead to the dilution of the censure or immorality attached to corruption as it becomes more common within the institutional framework (Vannucci, 2015). With the period of time, corruption becomes entrenched in the institutional context and the informally regulated practices of corruption create more profitable opportunities for corrupt practices that are finally rooted in formal procedures and even influence the decision-making processes within the institutions (Vannucci, 2015). In this way, the interactions between individuals lead to the creation of pathways and processes that neutralise the moral effect of corruption, and make it more acceptable in the institutional context. As corruption becomes more prevalent within the institution, individuals have fewer risks in engaging in corruption. The primary difference between the institutional economics and neo institutional approaches is that the latter focuses on the institution and the place of the actor within the institution, whereas the former focuses on the actor or individual himself.

The difficulty with the application of the neo institutional approach is that it puts the focus to a large extent on the institutional arrangements and social relationships which is incompatible with free choice of individuals and limits free choice by the institutional paradigms. The model views corruption in the context of economic and social exchange as facilitated by and embedded in a social structure. This economic and social exchange is seen as beyond individual control and motivation. By taking the exchange outside the control of individuals, the neo institutional theory undermines the free choice and rationality that individuals do have and also confuses the variety of reasons why people do commit corrupt activities and puts all the reasons into the institutional context, when individuals may also commit corrupt acts due to their reference to the benefits and costs paradigm as noted by the institutional economics paradigm. This is not to say that individuals are not impacted by all kinds of formal and informal constraints that are placed upon them by institutional settings because institutional settings do play a role in leading to corrupt activities by agents. However, to place all corrupt activities within the context of institutional settings takes away from the other reasons why individuals may commit corrupt acts. These include rational choices made by individuals for committing corrupt acts.

Neo institutional theory also argues that institutional arrangements are used to economise on transaction costs (Vannucci, 2015). Transaction costs are defined as “costs that occur as a consequence of exchanging services or goods for a return. They include costs associated with searching for partners, determining contract conditions, and enforcing the agreement” (Vannucci, 2015, p. 9). As actors have to expend transaction costs to safeguard the corrupt and illegal transactions, they may be motivated to create or help perpetuate institutional conditions that minimise such transactional costs for them. This means that institutional arrangements may be placed by actors themselves for minimising the costs of transacting with each other. As actors do not have institutional safeguards that protect them from the opportunistic behaviour of others who may transact corrupt exchanges and then refuse to abide by the conditions of the transactions. In the absence of any institutional safeguards, there are no remedies available to the other side of the transaction. Therefore, individuals create institutions as a consequence for the need to maximise behaviour of economic actors (Vannucci, 2015). As noted

Corrupt actors must find an environment that is favourable to carrying out illegal transactions. Networks have to be available, ensuring that favours are reciprocated even where this contradicts with other virtues. Corruption flourishes where institutions allow trust to relate only to conspirators rather than to the whole of society (Vannucci, 2015, p. 7).

The creation of institutions envisages creation of norms that are favourable to conducting illegal and corrupt activities. As mentioned above where institutions allow the creation of trust between conspirators, there corruption is facilitated by institutional conditions. However, this may be not entirely correct. As argued by Schweitzer (2002), corruption is not always a violation of norms. Corruption can be a conflict between universalist norms and particularist norms, where the former are aligned to morality and therefore anti-corruption, and the latter normalises corruption (Schweitzer, 2002). However, as there is a conflict between the two norms, normative ambiguity is resulted from such conflict and in that ambiguity there is a facilitation of corruption as particularistic norms may be considered to be more binding than universalistic norms (Schweitzer, 2002). Universalistic norms can also be seen in the concept of general trust and particularist norm can be seen in trust between conspirators (Schweitzer, 2002). When there is conflict betweeen general trust and trust between conspirators, a normative ambiguity arises and there can be perpetuation of corruption in this respect.

Neo institutional theory has been useful in explaining the increase in incidence of corruption in the context of developing economies, wherein it is considered that the cause of corruption is not just the rational choice of the individual, but the development of such informal and formal institutional practices which encourage corruption. This contexualisation of corruption from the perepective of developing countries has been seen for some decades now with early writers focused on the need to move away from studying corruption as individualistic acts of deviant behaviour (Anderson, 1988). The focus was more on institutionalising of corruption as informal rules and routines, which led to pressurinsing on individuals to perform corrupt acts according to these formal and informal norms (Anderson, 1988). Della Porta and Vannucci (2012) describe such conditions in developing nations as part of the development of the “basic norm of this invisible legal system sanctions the unavoidability of bribes, the rule that recourse to hidden exchange cannot be avoided in return for any “resource” of value obtainable from the public structure within the corruption network” (p.230). In this context, neo institutional theory has been useful because it has been able to explain one of reasons for corruption in the developing nations where institutional norms have developed to allow the corrupt transactions between people and those who may not want to commit a corrupt act may still be pressured to do so because corruption becomes the norm.

Corruption as a norm is seen in many nations of the world. When that norm of corruption is generalised within the institutional setup, individuals are expected to conform to the norm because that is the expected value that people must achieve (Persson, et al., 2012). As stated by Persson, et al. (2012), “in the majority of the world’s countries, corruption is the expected behavior rather than the exception” (p.64).

However, even if the argument that neo institutional theory can explain the causes for corruption in developing countries is accepted, it is still a question as to whether the theory can explain the institutionalalisation of corruption among the developing countries, where such institutionalisation is not uniformly seen in the same manner.

At this point it may be noted that there are two variants of the neo institutionalist approach, which are the game-theoretic and the transaction costs approaches. These approaches consider the risks of engaging in corruption as dependent on institutionalisation of corruption through the interaction between individuals (Hellmann, 2017). As per the game-theoretic approach, in situations of high-corruption equilibrium, the risk of engaging in corruption is low because as corruption is endemic, there is a lack of mechanisms in which principals monitor and punish agents for their corrupt behaviour (Rothstein, 2011). As corruption becomes the expected behaviour, individuals cannot trust other individuals to play the part of the principal and punish wrongdoers (Rothstein, 2011).

The transaction costs approach emphasises that there are two mechanisms that explain how interactions shape the agent’s risk calculation (Lambsdorff, 2007). First, instead of the one-off corrupt exchanges that the institutional economics approach highlights, there are transaction costs that arise when corrupt acts are carried out repeatedly between the same partners, increasing mutual and strengthening expectation that the others will not betray them (Lambsdorff, 2007). Second, in a high-corruption equilibrium, the risk of getting caught and punished for corrupt behaviour is lower because there is an emergence of actors who specialise in the enforcement of exchange arrangements of corrupt practices (Della Porta & Vannucci, 2012).

Neo institutional approach may also explain corruption in the developed countries where institutional conditions see a transaction cost for corruption. An example can be seen in the existence of the code of silence or the blue wall of silence in the police forces across nations, including the UK (Westmarland & Rowe, 2016). Police officers may refuse to testify against their peers who indulge in corrupt activities because they consider themselves to be bound by an unwritten set of cultural rules that demand loyalty to colleagues (Westmarland & Rowe, 2016). In such a situation reporting a fellow officer may be considered to be a serious matter with serious repercussions, including refusal of protection from enemy fire (Westmarland & Rowe, 2016). In this, institutional pressure may be felt by fellow officers to hide corruption and also at times indulge in corruption to support fellow officers because this is what is expected of them (Westmarland & Rowe, 2016).

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Conclusion

Institutional economics approach seeks to explain the causes of corruption on the basis of the rational choice of the individual to do a corrupt act based on the benefit or self-interest that he can derive out of such corrupt act. While this theory can help explain why corruption occurs from the perspective of the individual; the theory fails to capture the reasons for corruption that exist outside the individual and can be seen in the institutional environment or the social network within which corrupt transactions occur. The neo institutional approach is wider and accepts the premise that causes of corruption can be exogenous as well as endogenous. In other words, corruption can occur because of self-interest, but it can also occur because of institutional conditions in which individuals are pressurised into corruption because it is what is expected of them.

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