Donatella della Porta and Alberto Vannucci
Introduction: a neo-institutional approach to corruption
In the contemporary literature on corruption we can distinguish between two main approaches to the interpretation and analysis of corrupt dealings: a socio- logical one and a political-economic one (della Porta and Rose-Ackerman 2002).
The first perspective looks at the differences in the cultural traditions, norms and values which inform the activities and choices of individuals belonging to different societies and organizations. The central focus is on the so-called ‘moral cost’, which reflects internalized beliefs, such as esprit de corps, the ‘public spirit- edness’ of officials, political culture and public attitude towards illegality. We can define moral cost as the utility that is lost because of the illegality of an action; it therefore increases with the development of a value system that supports respect for the law.1 For an individual, ‘the moral cost is lower the more ephemeral appear to him those circles of moral recognition that offer positive criteria for the respect of the law’ (Pizzorno 1992: 46). Individuals suffer higher costs when, in both their own and their peers’ perspectives, corrupt behaviour involves a viola- tion of values – like ‘public service’ – which are deeply internalized and socially shared. Variations in moral cost can therefore explain the different individual responses to similar opportunities for corruption: ‘people in a given society face the same institutions but may have different values’ (Elster 1989: 39). Given similar institutional conditions, levels of political corruption will vary with the average moral attitude among citizens and public administrators.
In an economicperspective, on the other hand, individuals rationally opt for corruption when, given their preferences, the institutional system of incentives and opportunities makes such activity profitable:
A person commits an offense if the expected utility to him exceeds the utility he could get by using his time and other resources at other activities.
Some persons become ‘criminals’, therefore, not because their basic moti- vation differs from that of other persons, but because their benefits and costs differ.
(Becker 1968: 172)
As with other behaviours involving deviation from laws and/or informal norms, individual decisions to participate in corrupt exchanges depend upon the probability of being denounced and punished, the severity of the potential pun- ishment and the expected rewards as compared with available alternatives. Polit- ical economists have singled out a number of variables that influence the individual calculation to participate in political corruption (Rose-Ackerman 1978). Institutional opportunities and incentives, in fact, constrain corruption choices. Several institutional variables play a crucial role. Among them are the following: the formal rules determining the costs of political mediation; the ease with which new agents or groups can enter the political system, and the probab- ility of electoral defeat; the overall level of state intervention in economic and social fields; the degree of discretionality involved in public acts; the relative effi- ciency of the various administrative and political controls; the forms of political competition; the types of markets where corrupt exchanges develop (della Porta and Vannucci 1999).
In what follows, building upon our research on the Italian case, we will elaborate on a third approach, which is a combination of elements from both the ‘moral cost’ and the rational choice perspectives, focusing on the (bad) social capital necessary in order for corruption networks to develop (della Porta 2000). We believe that, as with any other social relationship or collective enter- prise, a corrupt exchange requires mechanisms of institutional governance that allow for coordination and cooperation among agents, overcoming free-rider problems.2But those institutional arrangements that lower the transaction costs of corrupt dealings, making them viable for rational agents, tend also to modify the values, identities and preferences of agents, rendering them less adverse to illegal activities.3The dynamics of corrupt arrangements often reflect the cumu- lative effects of the intertemporal linkages between institutional change, subject- ive perceptions and the beliefs and motivations of public and private agents.
Transaction costs are higher in corruption (as well as in other black markets) than in ordinary markets. The ‘natural’ environmental conditions for corruption are in fact secrecy, lack of transparency, severely restricted participation, and the high costs of ‘exit’ (Lambsdorff 2002: 222); corrupt activities must be per- formed clandestinely and cautiously and cannot be guaranteed by courts. The search for a counterpart, the gathering of information on the services exchanged and the potential partners’ trustworthiness, the negotiation of an agreement, the exchange of ‘commodities’, the verification of the fulfilment and the poten- tial enforcement of the ‘bribery contract’ are extremely risky and costly in terms of the time and other resources required to fulfil them. More specifically, corrupt agreements – being illegal – cannot be enforced by the public institu- tions (such as the judiciary and the police) which are usually available in order to punish deviation from legally codified contracts and agreements. In addition, corrupt transactions are often non-simultaneous in nature, and one party must rely upon the word of the other. As a consequence, the property rights of the public agents and the corrupter on their quotes of ‘political rents’ (the bribe and the public benefit allocated to them) are very uncertain, since the activities
required in order to collect them present two specific risks: an external one, such as being discovered and punished by control agencies or by social stigma, and an internalone – for example, buying a ‘lemon’ or, more generally, being cheated or denounced by the counterpart.4
In spite of transaction cost barriers, more or less complex networks of corrupt exchanges can nevertheless develop with governance mechanisms (that is, a kind of organizational framework) that help to meet the ‘demands’ for pro- tection of the fragile and uncertain property rights at stake in the corruption domain.5 Such structures can become self-enforcing, sustaining ‘honest’ trade relationships among different corrupted agents and generating stable expecta- tions that constrain their actions by imposing the fulfilment of the illegal con- tracts. Various and interrelated sanctioning systems may sustain the enforcement of corrupt agreements. First-party control occurs when the infor- mal norms of corruption have been internalized to such extent that their viola- tion produces a psychic cost, such as feelings of guilt or discomfort (Panther 2000).6 When all partners (as potential cheaters) share similar internalized norms, corrupt exchanges can be successfully concluded. A potential basis for
‘reliable’ corrupt transactions is thus the involvement in it of relatively homo- geneous agents, who share customs and ideological and cultural values (opposed to or at least autonomous from those embodied in the respect for state’s norms), which can produce expectations of reciprocal implementation of corrupt agreements. The corresponding endogenous rule of the game relies on the negative feelings associated with the betrayal of commonly internalized codes of behaviour.7
The sharing of illegal norms is, however, rarely so strong as to discourage free-riderism: second-party enforcement, with sanctions directly administered or credibly menaced by counterparts in corrupt exchanges (Ellickson 1991), is therefore often necessary. The resources used to enforce agreements are nor- mally related to the relation-specific expected advantages of a reiterated rela- tionship. The establishment of personal trust can be interpreted in this perspective: when there are frequent bilateral opportunities for repeated inter- action, being cooperative (i.e. not cheating), can become the more advanta- geous strategy faced with the menace of termination (or other forms of retaliation) in a dishonest transaction. Moreover, the acquisition of a reputation for ‘honesty’ in illegal dealings, thanks to the circulation of information on pre- vious behaviour within the restricted circles of agents involved in the corrupt game, permits the reduction of the expected risks of interactions in a wider network of exchange.
When the domain of the corruption network widens, increasing the costs of the ex ante gathering of information, identification of partners, monitoring of agreement and sanctioning of deceitful partners, a third party, distinct from those directly involved in the corrupt deal, may become necessary in order to regulate the illegal exchanges. In this work, we will survey and analyse some of these third-party enforcement mechanisms which can guarantee a ‘private- order’ regulation of corrupt dealings. As we will show, third-party enforcement 154 D. della Porta and A. Vannucci
mechanisms are generally not neutral to the transacting parties, in the sense that the ‘enforcers’ do not restrict themselves to prescribing and automatically observe and sanction rules for compliance (as in the idealized operations of the protective state). Actually, there are problems of reliability and incentive- compatibility in the activities of individual agents and organizations when they are involved, as suppliers of protection, in the market for corruption. In order to be credible as guarantors chosen and trusted by corrupt agents, they have to control and exhibit specific resources. Moreover, to guarantee property rights and to enforce agreements has a cost, which tends to increase when such deal- ings and resources are illegal or illegally acquired. At the same time, protection and regulation activity has ‘public good’ attributes that makes it to a certain extent exploitable by free-riders, a dilemma that modern states have tried to deal with through recourse to compulsory taxation. But third-party enforcers of corrupt dealings, with the possible exception of mafia organizations, cannot use violent resources in order to be paid for their protection services. They must therefore also police their ‘extractive’ activities in order to control and incen- tivize payments from partners in corrupt transactions. On the other hand, since the essence of protection consists of the ability to impose costs, partners in corrupt transactions must also be reassured that guarantors will not use their power in order to seize (instead of protect) their resources.8
In this neo-institutional perspective, we single out norms and other mechan- isms that can develop to sustain, facilitate and enforce illegal, corrupt deals. In the second section we try to shift from a causal model to a more complex path- dependent equilibrium model, assuming that corrupt institutions themselves are active in reproducing the preconditions for their successful development and that accidental factors can induce the development of a number of possible out- comes under the same set of initial conditions. In the third section we present a typology of mechanisms which can be used to regulate and coordinate corrupt activities. Through the crossing of two variables – enforcement services centred in the public sector or outside it and the use of resources related to the role within a hierarchical organization or to the position occupied within a decen- tralized network – we identify four models of corrupt governance: party corrup- tion, gang corruption, clan corruption and entrepreneurial or middlemen corruption. Finally, concluding remarks are presented.
We shall address the analysis of governance mechanisms by using empirical data and examples derived from the Italian context, both before and after the
‘Clean Hands’ investigations, which, in the early 1990s, produced an (appar- ently significant) turnover in the political class and the party system. In order to describe the dynamics of corrupt exchanges we shall make use of the trial records, including interrogations and documents, for about one hundred cases of political corruption, four hundred requests for judicial action against Members of Parliament (between May 1992 and July 1993), articles from daily and weekly newspapers, and about sixty semi-structured interviews with experts from both the public and the private sector.
Due to a quite rare combination of two factors – the large-scale diffusion of
corruption networks and the unprecedented exposure given to the judicial
‘Clean Hands’ inquiries – the Italian case seems particularly well-suited for the study of third-party governance mechanisms in corrupt exchanges. Although focusing mainly on the Italian case, we believe, nevertheless, that this approach has a more general value and can be fruitful in a comparative perspective as well.
As North (1990: 3) observes, institutions are the ‘rules of the game in a society or, more formally, are the humanly devised constraints that shape human inter- actions’, reducing uncertainty and transaction costs. There are three types of institutions: formal rules (constitutional rules, statutory laws, regulations, con- tracts, etc.), informal constraints (social norms, customs, conventions, etc.) and their enforcement mechanisms. A rule is institutionalized when actions taken by agents based on their subjective beliefs and expectations become mutually con- sistent over a certain period: in this case, the observed reality created by their choices tends to confirm their beliefs, which are then reproduced as a guide for further actions (Aoki 2001: 3). The function of shared beliefs about the nature of interaction and other players’ expected choices is crucial for the understand- ing of institutional change: when observed actions do not meet anticipated results, a search for new models can lead (more or less rapidly) to the conjoint adoption of a new (relatively) consistent system of subjective perceptions of others’ action-choice rules. From this perspective, an institution exists only when agents mutually believe in the summary representation (tacit or explicit) of rules which coordinates their beliefs:
For example, even if the government prohibits the importation of some goods by a statutory law, but if people believe it effective to bribe customs officers to circumvent the law and make it a prevailing practice, then it seems appropriate to regard the practice rather than the ineffective statutory law as an institution.
(Aoki 2001: 13) Since in illegal markets uncertainty and transaction costs are higher, ‘private- order’ mechanisms and other governance structures play a crucial role in these contexts. The use of comparative institutional analysis seems to be particularly fruitful in this field. Investigating the institutional diversity and the complexity of organizational responses to the common problem of reducing the transaction costs of corrupt activities can shed light on the variables that influence the pro- found differences in the diffusion and characteristics of corrupt networks, which are also recognizable in similar political and administrative environments:
That is, institutional arrangements can be diverse across economies even if they are exposed to the same technological knowledge and are linked through the same markets. Thus we need to rely on comparative and historical information to understand why particular institutional arrange- ments have evolved in one economy but not in others.
(Aoki 2001: 3) 156 D. della Porta and A. Vannucci
A path-dependent analysis of the dynamics of corruption
Hidden markets for corrupt exchanges are generally characterized by different structures of informal institutions and their enforcement mechanisms, which include the above-mentioned self-sustaining illegal conventions, moral codes, self-enforcing contracts, reputation and third-party sanctioning, as well as several organizational architectures (limited in their scope or more elaborate and wide-ranging), whose resources are used in order to protect illegal dealings and informal property rights.9 From this perspective, the significant discrepan- cies in the levels of (perceived) overall corruption, even among countries with similar institutional arrangements and economic development (Transparency International 2002), may be explained by the path-dependent progressive affir- mation of more or less efficient governance mechanisms of illegal agreements.
While the economic and the ‘moral cost’ approaches emphasize, respectively, the relevance of the structure of institutional opportunities and that of internal- ized values as causal factors that can induce corruptive choices, the neo- institutional perspective stresses the dynamic aspects of institutional interdependencies, which can give rise to multiple, sub-optimal arrangements.
Path dependency in political processes is grounded in the presence of increasing returns or positive feedback from specific activities: a step in a particular direc- tion increases the probabilities of further steps along the same path, since the relative benefits of that activity, compared with other possible options, increases over time, together with costs of ‘exit’ (Pierson 2000: 252). According to Arthur (1994: 112–13), unpredictability, inflexibility and potential inefficiency are among the characteristics of increasing returns processes. Since early events have significant impacts and are often casual, many unpredictable outcomes are possible from the same set of initial conditions. Moreover, the farther a process has developed, the more costly the shift from one path to another, until it even- tually locks in one solution, which in the long run may produce less-efficient results than a possible alternative.
Four features of social interaction and institutional adaptation tend to gener- ate positive feedback effects: (1) large set-up or fixed costs of new institutions, (2) coordination effects, (3) learning processes, and (4) the adaptive expecta- tions they generate (North 1990: 95). Once established, institutions reinforce their own stability and further developments through these mechanisms, not only at the level of individual organizations and institutions but also at the macro level of institutional arrangements, which often show complementarities among a number of connected rules and expectations. Corrupt networks can exhibit similar ‘scale economies’, both at the level of individual activities and at a macro level; that is, the costs of offering illicit services increase less than pro- portionally to the overall level of the phenomenon’s diffusion.
The set-up costs
An analysis of the dynamics of corruption indicates that this illegal activity may feed itself: ‘the critical attitude towards the non-corrupt in a corrupt society is a main mechanism behind this snowball effect’ (Elster 1989: 268). An indi- vidual’s or organization’s first involvement in corrupt activities usually entails high set-up costs due to the combination of both expected legal penalties and moral costs, as well as the effect of the expected risk of spoiling one’s reputation for integrity and honesty. As a former mayor of Miami explains: ‘I took my first bribe in my second term on the city commission. It’s a terrible thing, like cheat- ing on your wife for the first time’ (quoted in Lambsdorff 2002: 234). There may also be a high fixed cost to setting up a corruption-favourable system of regulation or administrative controls, but subsequent acts of corruption will become more profitable, lowering the possibility of legal sanctions being imple- mented and presumably also the corresponding sense of guilt. A similar effect may paradoxically accompany the stigma suffered by corrupt agents as an effect of being suspected, denounced or convicted. Once they are labelled as corrupt or easily corruptible, agents have an incentive to continue their ‘criminal career’
since the opportunity cost of further offences has been reduced while the blemish on their social reputation has already diminished legal prospects (Opp 1989). Furthermore, search costs are very high at the beginning of the corrupt agents’ career, when they still do not possess information on the characteristics of the corruption environment and potential partners’ reliability. Once such fixed costs have already been borne, individuals and organizations have an incentive to pursue illegal activities over time in order to reduce the ‘unit costs’
of corruption.
Coordination effects
Coordination effects are also very important in the market for corruption. The relative benefits that corrupt agents receive from their activities often increase as others adopt the same strategy. In general, the more widespread the corruption, the lower the search costs and the risk of being denounced for those who decide to engage in illegal practices and the higher the costs for those who try to remain honest and are therefore excluded. The diffusion of corruption reduces both the sense of guilt and the risk of losing face while increasing, on the other hand, the possibility of finding dependable partners for corrupt trans- actions (Andvig 1991). Where corruption is generalized, the risk of being accused appears to be extremely low, given that the control agencies must dis- tribute their resources over a far wider area: ‘If only a few people steal or loot, they will be caught; but if many do, the probability of any one of them getting caught is much lower, and hence the returns to stealing or looting are higher’
(Murphy, Shleifer and Vishny 1993: 409). Moreover, they meet increasing dif- ficulties, due to the conspiracy of silence between corrupt agents or the greater ease of concealing evidence. In fact, since corrupt practices are usually closely 158 D. della Porta and A. Vannucci