Letting the Briber Go Free
A situation where a government official uses his position to acquire illicit benefit is called corruption. Corruption is a big problem in many countries and governments design different policies to curb it. According to one of the proposed policies (sometimes called the Basu proposal ), the government should make it legal to give bribes and severely punish only bribetakers.
a) (10 rp) Explain the logic behind this proposal: why may it work?
The mechanism of asymmetric punishments creates incentives for the bribe-giver to report the facts of corruption (blow the whistle), and so, by backward induction, reduces official's incentives to take bribes.
It is not enough to say that increasing the fine for corrupt officials decreases their incentives to ask for bribes. There is nothing special about increasing fines (why not increase fines for both sides?), Basu proposal is special because it encourages whistle-blowing.
b) (10 rp) Suppose Alice and Beatrice are trying to pass a test to get the driver's licenses. Alice is a good driver. However, Beatrice is a hazard to other drivers and is about to fail the test. The examiner is corrupt and tries to maximize his revenue from bribes. How will implementing the Basu proposal might affect Alice and Beatrice?
If the examiner is corrupt, he will try to receive bribes from both ladies, but these are different types of bribes. In the case of Alice, what official does is called extortion (mzdoimstvo in Russian) — he tries to receive bribe for performing legal actions that are supposed to be free of charge.
In this case, implementing the Basu proposal will create perfect incentives for Alice to blow the whistle, but probably the official will expect that so implementation is likely to reduce corruption.
Things are different for Beatrice. In her case, the examiner will try to receive the bribe for something he is not supposed to do at all (issuing the licence for a person who cannot drive) — in Russian it is called lihoimstvo2. Of course, if Beatrice rats the examiner out after Basu proposal implementation, she will receive her bribe back but will also have to return her driver's licence because it was issued illegally. But why apply for the licence in the first place? It was a voluntary, mutually beneficial transaction between her and the examiner (although producing negative externalities for society), so cancelling it will make ger worse off. Thus, implementing Basu proposal in the case of Beatrice won't be effective.
c) (10 rp) Generalise the example above: for what class of bribes the Basu proposal can be an efficient policy?
The answer follows from b): Basu proposal can be an efficient policy only for those cases of corruption when the official tries to extort money for doing his official job.