Corruption as an Assurance Problem

This paper suggests that corruption presents an assurance problem. An assurance problem exists when all actors are better off if they adhere to at least the same minimal standard, but are second best off if, in the event that there are defectors, they join the defectors rather than continue to adhere to the standards, and are worst off if there are defectors but they do not join those defectors. Actors faced with an assurance problem, therefore, must choose between cooperating in hopes of accruing the greatest benefit or defecting as a defensive measure. The best mechanism for society to prevent the difficulties created by assurance problems is to impose legal penalties on defectors, but that is not possible in endemically corrupt systems. In that case, collective action offers the best solution. Bribery often presents an assurance problem for business actors in markets that experience corruption. Arguably paying a bribe in some circumstances confers a short term advantage. Business firms understand, however, that paying bribes imposes long term costs, and firms would prefer not to pay bribes. If bribery does confer a short term advantage, then even firms that would prefer to enjoy the long term benefits of not paying bribes might feel pressure to pay bribes in order to survive short term competition. Collective action offers a solution to this dilemma. This paper draws from the lessons of the Panamanian group, Asociación Panameña de Ejecutivos de Empresa (APEDE), which was an early leader in collective business responses to the difficulties created by bribery.