FIGHTING CORRUPTION: MONITORING OFFICIALS’ SPENDING LIKELY TO BE MORE EFFECTIVE THAN RAISING THEIR PAY

Improving the salaries of public officials is often suggested as a way to fight corruption. But according to research by Rafael Di Tella and Federico Weinschelbaum, published in the October 2008 issue of the Economic Journal, generous monetary rewards are not only unpopular with the public, they would also have to be extremely high to deter corruption. What’s more, they make it very difficult to monitor officials’ consumption, which has proved to be a very effective way of spotting corruption.

Research on corruption has discussed the effects of higher incomes on the behaviour of public officials in positions where there are opportunities to take bribes. The main argument is that officials will not engage in risky activities, such as bribe taking, when there is a wage premium to working in the public sector.

But when the level of consumption of officials is observable, there is a second effect of wealth, one that is evident in a large number of corruption cases. It is illustrated by the actions of the leaders of the uprising against President Ferdinand Marcos of the Philippines in 1986. After finding a number of luxury items at the presidential palace, they reasoned that, since Marcos was not a wealthy man before entering politics, these items were probably acquired with dishonest income.

This is the logic used in the overwhelming majority of the cases where high-level corruption has been detected and punished. In the early 1980s, the Mexican government charged the former chief of police of Mexico City with fraud. One of the reasons for the charges was his high standard of living. He had 1,200 servants and a second home modelled on the Parthenon, all while on a $1,000 monthly salary.

The biggest spy scandal in the CIA’s history occurred when counter espionage agents inquired how one of their top agents, Aldrich Ames, was able to afford a Ferrari. In the end, Ames’ luxurious lifestyle prompted an investigation that uncovered the sale of secrets to the Soviet Union on the largest scale ever. Among these secrets was a list of CIA agents who were subsequently killed by the Soviets.

Tella and Weinschelbaum show that salaries would have to be extremely high to deter corruption. This is due to a combination of there being a very low chance of being detected for crimes of bribery and the large amounts of money that can potentially be embezzled.

In practice, there are very few examples of countries where politicians earn the kind of money that could deter corruption. One possible reason is that a policy of high salaries for politicians does not carry much favour with the public. Furthermore, there is no reason to prefer richer officials when the public can observe the wealth of the politician. In other words, when the rich can easily hide the bribes they have obtained, they will tend to bribe more.

A formal contract that gives out generous monetary rewards to politicians makes monitoring consumption difficult. When consumption is not observable, the cost of increasing the wage one dollar is just this dollar. But when high wages reduce the effectiveness of monitoring consumption, there is an additional cost from the reduction in the probability of detection.

A natural implication is that societies concerned with political corruption should extend the coverage of personal income taxes. This is because a history of payments of personal income taxes prior to entering political office provides a useful benchmark from which to monitor the consumption while in office.

ENDS

Notes for editors: ‘Choosing Agents and Monitoring Consumption: A Note on Wealth as a Corruption-controlling Device’ by Rafael di Tella and Federico Weinschelbaum is published in the October 2008 issue of The Economic Journal.

Rafael di Tella is at Harvard Business School. Federico Weinschelbaum is at the Universidad de San Andres.

For further information: contact Rafael di Tella on +1-617-495-5048 (email: rditella@hbs.edu); or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).