| Abstract: |
This dissertation contains four separate studies in the fields of corruption
and cooperation. The first chapter explicates the mechanism that links the
fractionalization of society with its level of corruption within a theoretical
model of relational contracting. The other three chapters describe
experimental studies. The second and third chapters evaluate two popular
anti-corruption policies, the ‘Four-Eyes-Principle’ and ‘Whistle- Blowing’,
with respect to their effectiveness in decreasing the level of corruption and
increasing social welfare. The last chapter considers the effect of endowment
uncertainty on cooperative behaviour in a linear public goods game and
explains it by specific conditional cooperation preferences. Cooperation
between decision-making agents is recognized as one of the single most
important mechanisms in economic research and represents one of the
cornerstones of economic development. Countless economic activities have been
analysed with game theoretic models of cooperation. Experimental methods may
not only demonstrate the deficiencies of standard economic theory in terms of
explanation and predictive power, they may also help to improve existing
models. The public goods game (Isaac and Walker 1988) represents one of the
most popular vehicles to experimentally analyse cooperative behaviour. It
models the dilemma of the opposition between selfish preferences and social
efficiency. Numerous experiments have shown that participants behave in a
highly cooperative way in situations for which the standard economic theory of
rational payoff maximization predicts strictly selfish behaviour. In my view,
the most convincing approach to explaining the phenomenon of cooperation is
the existence of conditional cooperative behaviour. This links the public
goods game to games that are specifically designed to analyze trust and
reciprocity, e.g. the gift exchange game (Fehr et al. 1993), the investment
game (Berg et al. 1995) and the ultimatum game (Güth et al. 1982).
Applications of these games even extend to criminal activities such as
corruption. Administrative corruption, defined as ‘the misuse of public power
for public gain’ (Klitgaard 1988) is recognized as the ‘single most important
obstacle to economic development’ (The World Bank 2008). The key to effective
anti-corruption policy with respect to institutional design is the
understanding of the determinants, mechanisms and weaknesses of corruption.
This demands the analysis of two different levels of cooperation common to
most corrupt transactions. Since any corrupt relationship is by definition
illegal, the corrupt partners cannot rely on legal third parties, i.e. the
courts, to enforce their contracts. The transaction between a client and a
corrupt official depends on trust and reciprocity which may be fostered for
example by repeated interaction. This kind of cooperation is similar to the
mechanism modelled in the gift exchange game. In contrast to the original gift
exchange game, where cooperation is efficient with respect to social welfare
(measured e.g. in the sum of payoffs to all affected individuals), corrupt
reciprocity is socially undesirable due to the reasonable assumption of its
strong negative externality to the public (Shleifer and Vishny 1993,
Rose-Ackermann 1999). In the case of instable corruption, it would be socially
optimal for all agents to stay away from reciprocity and cooperation, and
adhere to their selfish rationality. The situation involving all members of a
society with respect to their choices for or against corrupt reciprocity can
hence be seen as a reverse public goods dilemma in a broader sense. The first
chapter focuses on the role of the fractionalization of a society in
determining the level of corruption. In a series of empirical cross-country
studies social fractionalization, often (crudely) measured by the
Ethno-Linguistic Fractionalization Index (ELF, see Appendix 1A) has been
identified as an important determinant of the level of corruption measured by
the Corruption Perception Index or similar indices (Alesina and Ferrara 2002,
Mauro 1995, Bardhan 1997). In a cross regional analysis, providing a more
controlled environment, Dincer (2008) finds an inversely U-shaped relationship
between the two variables. However, none of these studies provides a model
based theoretical explanation for the empirical evidence. As a basis of our
analysis we use an infinitely repeated version of a standard, multi stage game
of administrative corruption which captures the enforcement problem of the
illegal transaction. In order to describe the main mechanism underlying the
relationship between the social structure and corruption we define the
structure of society in terms of its fractionalization as a vector of
separated sub-networks whose members share information. Assuming that clients
use simple punishment strategies as devices to maintain corrupt cooperation
within relational contracting, we find that the maximum level of corruption is
to be expected in societies that consist of a large but not maximal number of
small (but not minimal) groups. This is due to the inversely U-shaped
relationship between the relative size of a sub-network (measured in the
number of group members relative to the size of society) and its members’
ability to stabilize corrupt transactions. The (relative) size of a sub-group
has two countervailing effects on the corruption level. On the one hand, the
(average) probability of a successful corrupt transaction (expected frequency)
increases in the number of group members. This is because the incentives for
opportunism decrease due to growing stakes for the official. On the other
hand, an increase in the relative sub-group size increases the (personal)
costs for the clients through the internalization of a larger part of the
negative externality. Thus, necessary compensation of a growing number of
peers decreases the profitability of corruption. This chapter provides a
model-based explanation of the inversely U-shaped relationship between social
fractionalization and corruption found in Dincer (2008). The results of our
model are also in line with empirical observations of cross-country
comparisons (Gunasekara 2008, La Porta et al. 1999 and Alesina et al. 2003).
Our model can be extended to account for considerations of the influence of
different types of social capital on corrupt behaviour. Using the standard
model of self-interested payoff maximization to analyse the mechanisms that
underlie the determinants of corruption may only be reasonable in situations
in which limit values and benchmark examinations are considered, and therefore
simplifying assumptions such as infinite repetitions are justified. In
finitely repeated interaction (or one shot games) of corruption, neither the
standard self-interested model nor models of strong reciprocity relying on
social preferences such as altruism (Andreoni and Miller 2002), inequity
aversion (Fehr and Schmidt 1999) or intentions (Dufwenberg and Kirchsteiger
2004) can provide a consistent explanation or predictions for corrupt
behaviour based on cooperation. This and the scarcity of reliable field data
complicate any analysis of corruption that aims at deriving policy
implications. In order to evaluate the usefulness of proposed anti-corruption
measures, or those that are in force, controlled experiments are indispensible
to complement empirical studies. The findings of several studies, e.g.
Armantier and Boly (2008), demonstrate the external validity of laboratory
corruption experiments (Dusek et al. 2004). Following Abbink et al. (2002)
with respect to experimental methodology, the second chapter describes an
experimental approach to assess one of the most potent countercorruption
policy tools, the ‘Four-Eyes-Principle’ (business has to be conducted by at
least two individuals, hence four eyes). Although proposed in various reports
and lists of recommendations for anti-corruption measures by national and
international organizations, it lacks any theoretical or empirical
justification (Pörting and Vahlenkamp 1998, Rieger 2005, Wiehen 2005). In our
laboratory experiment we replace a single decision-maker with a small group of
two officials who decide jointly in the role of the official in order to model
the introduction of the ‘Four-Eyes-Principle’. We show that the introduction
of the ‘Four-Eyes-Principle’ can lead to an increase rather than a decrease of
the level of corruption. This result comes as a surprise when considering
predictions from the standard self-interested model alone and ignoring effects
stemming from the dynamics of group decision-making. Controlling for effects
that are purely driven by differences in marginal incentives (i.e. effects
stemming from the splitting of the benefits and costs of corruption between
two officials) we find that group decision-making is dominated by the motive
of individual (long term) profit maximizing, which has been identified as a
main explanation for group decision-making (Kocher and Sutter 2007). Combining
data of final choices (outcomes) with evidence from inside the decision-making
process (i.e. the dynamics of individual choices), we show that groups follow
strategies that foster reciprocity in a more sustainable way than their
individual counterparts, which leads to a higher number of successful corrupt
transactions. To explain the behavioural characteristics in more detail, we
analyse the content of electronic chat messages exchanged during the joint
decision-making process. In an average situation of disagreement between two
officials, it is the official with the more corrupt agenda who dominates the
decisions despite the honest official’s veto power. Since corrupt reciprocity
maximizes individual payoffs for the immediate transaction partners, arguments
in favour of a strategy that fosters corrupt reciprocity are most persuasive.
We interpret this result as support for the Persuasive Argument Theory
attributing groups a higher ability to adhere to behaviour that generates
maximum individual payoffs (Pruitt 1971). Our results show that the profit
maximizing motive may dominate in the group decision-making process even
though there is an obvious trade-off with social efficiency. Since they ignore
the negative external effects of corruption, groups produce the least
desirable outcomes in terms of welfare by their reciprocal behaviour. Against
existing policy recommendations, the results of our experiment cast doubt on
the usefulness of the introduction of the ‘Four-Eyes-Principle’. This chapter
does not only evaluate an anti-corruption measure, it also provides insights
into the motivations, within groups and individuals, that underlie strategic
decisions in social dilemmas in general and in the dilemma of corruption in
particular. The third chapter experimentally assesses the effectiveness of
another tool of anticorruption policy. The institutional enabling of
whistle-blowing is seen as a powerful measure to contain corrupt activity
(Drew 2003). Whistle-blowing is generally defined as ‘the act of disclosing
information in the public interest’. Despite its widespread use and perceived
success, experimental evidence seems to cast doubt on its usefulness (Abbink
2006, Lambsdorff and Frank 2010, forthcoming). This may be because the
analysis of whistle-blowing within the standard set-up of a corrupt
transaction accounts for only one aspect of its total effect on social
welfare. The standard game of corruption, often used to analyse the effect of
a determinant on the frequency of corruption, only considers the direct but
not the indirect consequences of corruption on social efficiency. While the
direct consequences may be captured by the expected negative externality to
the public resulting from a successful corrupt transaction, the indirect
consequences include efficiency losses caused by honest clients leaving
productive markets because of their fear of being exploited by corrupt
officials. Where in the standard game of corruption the official has a passive
role with respect to the initiation of a corrupt transaction, we expand the
standard model by allowing both sides of the transaction to activate
corruption. The symmetry of corrupt engagement enables us to assess the
potential effects of the introduction of the opportunity to blow the whistle
on the two main negative consequences of corruption. First, whistle-blowing
may reduce the negative effect of corruption hindering ‘honest’ clients to
engage in productive activity by providing a tool against demanding corrupt
officials. Second, whistle-blowing may affect the stability of the corrupt
transaction and influence the number of successful deals and hence the amount
of realized negative externalities. We find that the total effect of
symmetrically punished whistle-blowing (i.e. the punishment is independent of
who has blown the whistle) is ambiguous. Confirming the findings of Lambsdorff
and Frank (2010) and Abbink (2006), whistle-blowing increases the stability of
a corrupt transaction. However we find that it also reduces the effect of
corruption deterring productive activity, offering a safeguard for an ‘honest’
client against the extortion by a corrupt official. We demonstrate that
asymmetric leniency for the official can offset the negative effect of
whistle-blowing. Our results can be explained using simple arguments as to
subjects’ belief structures and payoff maximization. Moreover, we find that
leniency is especially effective for male officials. The consideration of
asymmetric punishment of illegal activities in general and leniency for
whistle-blowing in particular should be considered in legislature. Our
extended model of corruption provides the basis for experimental research
targeting both direct and indirect effects of corruption. While the focus of
the first three chapters is on the negative consequences of cooperative
behaviour in corruption, the fourth chapter, which is joint work with Johannes
Maier, considers socially desirable cooperation. In an experimental public
goods game using the Voluntary Contribution Mechanism (Isaac and Walker 1988)
we study the effect of uncertainty as to others’ endowments on contribution
behaviour. In most applications of public goods provision it is more realistic
to assume heterogeneity instead of homogeneity of initial endowments between
cooperation partners. The own endowment can be private information, which
means that endowment levels of fellow group members can be unknown. In
situations of charitable giving, for example, endowments (individual wealth
levels) are likely to be heterogeneous and information about them remains
private, while information about actual contributions (donations) are often
made publicly available. To quantify and explain the effect of endowment
uncertainty on cooperative behaviour we use an adapted version of the
experimental two-stage approach used by Fischbacher and Gächter (2010). In the
first stage of our experiment, subjects had to state their contribution
preferences conditional on their group partners’ contributions and endowments.
Here we used an incentivized strategy method (Selten 1967). In the second
stage, we quantify the effect of uncertainty in a repeated linear public goods
game (ten periods) played in partner design with groups of three participants.
While subjects knew their own endowment and the endowments of their two group
partners in the certainty treatment, they only knew their own endowment, low
or high, in the uncertainty treatment. However, they knew that the others were
either high or low endowed. When we pool all observations of each treatment,
we only find a small negative but insignificant effect of uncertainty on
average contribution levels. When we separate observations according to
participants’ endowments, we find that subjects with high initial endowments
contribute slightly more, while participants with low endowments contribute
substantially less under uncertainty. These two opposing effects of
uncertainty lead to lower contribution levels in poor and higher contribution
levels in rich groups. The inequality in income levels between low and high
endowed subjects therefore increases through uncertainty. We explain our
treatment effects by two mechanisms, the effect of deviating beliefs and the
net effect of (strategic) over-contribution. We attribute both effects to
conditional contribution preferences. One of our main results is that subjects
are relative conditional contributors. In the context of heterogeneous
endowments this means that they contribute more, the lower their group
partners’ endowments holding their absolute contributions constant. This and
the findings of systematically deviating beliefs explain the former of the two
mechanisms. Under uncertainty, low endowed subjects believe that they are in a
richer group than they actually are and therefore contribute less in the
repeated public goods game than they would have done, had they known the
correct endowments of their group partners. High endowed subjects, on the
contrary, believe that their group members are poorer on average and hence
contribute more. The preference for relative conditional cooperation also
explains the treatment differences in (strategic) over-contribution that
remains when we subtract the effect of deviating beliefs. The intuition for
(strategic) over-contribution is that subjects contribute higher levels in
repeated games than their stated preferences should allow in order to trigger
positive reciprocity and thereby sustain cooperation (see e.g. Fischbacher and
Gächter 2010). In contrast to groups in the certainty treatment and groups
consisting of high endowed individuals in the uncertainty treatment, we do not
find (strategic) over-contribution in groups of low endowed individuals under
uncertainty. We attribute this to their fear of sending the wrong signals
(i.e. being high endowed) by making large contributions. This fear may be due
to participants’ anticipation of others’ relative conditional cooperation
preferences. Overall, the combination of the two mechanisms explains a large
fraction of our treatment effects. This paper not only explicates contribution
behaviour under uncertainty, it also expands the knowledge of conditional
cooperation preferences in general. Its results motivate future research on
the theoretical foundations of conditional cooperation. All four chapters
contain their own introductions and appendices so they can be read
independently. |