Fighting Corruption with Zero Rupee Notes

Eliminating corruption is one of the trickier tasks on the path to economic liberalization and development. In India, the simple tactic of handing bribe-solictors zero Rupee notes seems to be having a surprisingly strong effect in fighting corruption. The notes, of course, are not real currency, although they look real. And the act of giving them seems to go beyond resisting giving bribes to turning it into an open charade.

In one sense this doesn’t surprise me, since bribery is a type of social convention, and as political scientist Gerry Mackie has shown, social conventions can, with the right type of response, be changed for the better very quickly.

On the other hand, I suspect the zero-value note approach may only work well in places where the corruption is relatively low-level and not accompanied by a seriously oppressive state. Still, that it appears to work in at least some places is cause for cheer.

Hat tip.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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17 Responses to Fighting Corruption with Zero Rupee Notes

  1. D. C. Sessions says:

    Baksheesh is how governments throughout history have operated. In many ways it’s a very efficient way to finance government, in a free-market sense: government is paid for by those who benefit from its services. There’s no need to budget for the civil service, because every government department is self-funded (with the next layer up taking a share of the business.)

    If you want government run like a business, that’s as close as you’re going to get.

    Attempts to change the system in countries like India are interesting, but based on history are very likely doomed to be short-lived. The USA, which for a while made a lot of noise about removing “corruption” from the system is now in the process of going back to the more traditional way of having office seekers openly “sponsored” by those who expect a (very) good return on their investments.

    Which is, after all, how markets work.

  2. James Hanley says:

    But in the marketplace we don’t cover things up with the fiction that they’re doing their work for the good of all. And in the marketplace we don’t require payments to avoid persecution or prosecution. So I do think there’s an important difference that’s being overlooked.

  3. James Hanley says:

    I should add, I’ve always been tempted to be either authoritarian or totally corrupt in the way I run my American Government class, just to drive the point home about how things could be.

  4. D. C. Sessions says:

    But in the marketplace we don’t cover things up with the fiction that they’re doing their work for the good of all.

    I can’t believe you’ve never seen advertising before.

    And in the marketplace we don’t require payments to avoid persecution or prosecution.

    Barratry is a profitable and time-honored business model.

  5. AMW says:

    D.C.,

    Two efficiency problems with corruption; one static and the other dynamic. The static efficiency problem is double marginalization. The government sets a price for services, but then the employees add a mark-up. The result is an inefficiently high price to the user.

    The dynamic efficiency problem is that when government employees and officials can make money from bribes, they have an incentive to regulate more and more activities in order to generate more and more sources of revenue.

  6. D. C. Sessions says:

    The dynamic efficiency problem is that when government employees and officials can make money from bribes, they have an incentive to regulate more and more activities in order to generate more and more sources of revenue.

    To generalize: When people with power can benefit from the exercise of power, they have an incentive to acquire more power.

    When you have a cure for that phenomenon, I’ll be very interested. In the meantime, retail corruption — baksheesh, mordita, whatever — at least subjects the abuse of power to market discipline.

  7. James Hanley says:

    D.C., I don’t follow you at all. How does baksheesh “subject the abuse of power to market discipline”? We’re talking about a monopoly extracting rents. There’s no market discipline there.

  8. D. C. Sessions says:

    D.C., I don’t follow you at all. How does baksheesh “subject the abuse of power to market discipline”? We’re talking about a monopoly extracting rents.

    It’s not a monopoly, though, when you have the subcontractor model like the Ottomans (and probably every other government back at least to Hammurabi) used. That’s because there are plenty of officials you can go to who are willing to take your bribe if the others charge too much.

    As we are constantly reminded by (to pick one) Posner: there really are no such things as monopoly rents, since charging above the market rate just pulls in more suppliers who will charge less. In the Ottoman system, those players who can make more money by charging less can afford to pay more for their offices and displace the ones who charge too much. It’s a basic distributor arrangement with competition for distributorships.

  9. Matty says:

    It’s not a monopoly, though, when you have the subcontractor model like the Ottomans (and probably every other government back at least to Hammurabi) used. That’s because there are plenty of officials you can go to who are willing to take your bribe if the others charge too much.

    Does India have such a model? I suspect not but I could be wrong, failing that would moving towards a subcontractor model be better for the average Indian who comes into contact with authority than the zero rupee approach?

  10. D. C. Sessions says:

    would moving towards a subcontractor model be better for the average Indian who comes into contact with authority than the zero rupee approach?

    That all depends on whether the “zero rupee approach” is sustainable.

    Power, like gravity, is a positive-feedback system: the more you have, the easier it is to acquire more. The natural tendency of human institutions over time is for power to concentrate until the system breaks for one reason or another, and as it concentrates the powerful build more and more mechanisms to collect even more. “Corruption” is a judgmental word for one of the ways that the powerful use to build empires, but the Universe isn’t obligated to respect that kind of judgment.

  11. James Hanley says:

    D.C., Yes, there can be a competitive market for government offices in which bribes can be demanded, but having the ultimate ruler selling offices to the highest bidder does not drive down prices for the “consumer”/citizen because there is no competitive market for the consumer/citizen’s dollar. The local official is not competing with other local officials in handing out building permits, etc. So what’s being sold by the ultimate ruler (assuming, dubiously, India works that way) is a local monopoly. And having a local monopoly, the bribe-taking official has no incentive to reduce the price for government services, but every incentive to increase them.

    I guess in your approach we’d have to say that there’s a competitive consumer market in cable television because cable companies can bid for the local monopoly in each town? I’m having a hard time seeing it.

    Anyway, the empirical evidence demonstrates that rents have not been competed away by competition among bribe-demanding officials, or else zero rupee “bribes” wouldn’t elicit the services. Try a “zero dollar bill” approach in Wal Mart and see if you get the same effect.

  12. James Hanley says:

    The natural tendency of human institutions over time is for power to concentrate until the system breaks for one reason or another, and as it concentrates the powerful build more and more mechanisms to collect even more. “Corruption” is a judgmental word for one of the ways that the powerful use to build empires,

    I disagree with this as well. Local corruption is decentralization of power, not concentration of it. Concentrated power is a top-down bureaucracy that exercises effective control over the periphery from the center.

  13. D. C. Sessions says:

    Professor, you’re arguing with yourself now. The two comments immediately preceding this one are mutually contradictory.

  14. James Hanley says:

    D.C.,

    I don’t see it.

    Local corruption means the local official has some degree of independent authority to set prices, to determine who receives government benefits, to determine the effective punishment for crime, effectively to engage in urban planning even. But that’s because he’s a local monopolist extracting local rents.

    Maybe I am missing something, but in that case I need clearer guidance from you. I can at times be a slow student.

  15. James Hanley says:

    D.C.,

    Is the contradiction in the idea of local monopolies vs. the idea that power is not concentrated? If that’s what you’re seeing, I can only say that concentration of power depends on what level we’re looking at. Power is in that case concentrated locally, but on the national scale is decentralized.

  16. D. C. Sessions says:

    The concentration of power effect operates at the highest levels precisely because they have the most scope. They may operate by delegation out of necessity, but unless they’re idiots (and eventually you do get idiots, which is often how such systems come unglued) they keep the satraps from becoming rivals by playing them against each other: competition.
    The two classic forms of competition then apply: competition for “customers” (i.e. more clients) and competition for suppliers (sucking up.)
    This can work pretty well. Think Chicago city government under the Daly dynasty: corrupt as all get out, and nobody crossed the Dalys, but the citizens knew that the potholes would get fixed and the cops would come when you called about a break-in. The graft didn’t get in the way of most people in the city.
    This works because the local monopolies aren’t allowed to act like monopolies. Among other things, they’re heavily regulated.
    Part of what makes these feudal-type systems work is that power is a zero-sum game and there’s no such thing as “enough.” Eventually it all comes apart (the term of art in control systems for the end-stage of a rate-dependent positive feedback is “catastrophe.”) Maybe from external influences (climate, enemy action, Hapsburg endemic idiocy, technology, someone changing the rules of the game, whatever.)
    But while it works, it can work quite well. The USA hasn’t been around all that long compared to quite a few historic empires that ran much more like the Ottomans than like we used to, and we’re already well down the road to neofeudalism already.

  17. James Hanley says:

    Mmm, ok, that’s worth pondering. But where did I contradict myself?

    we’re already well down the road to neofeudalism already.
    I keep hearing this, but are we really closer to that than we were in the 19th century? Or farther away? My take is that it’s much harder for local elites to totally dominate a town politically now than it ever has been in our country’s past.

    It’s kind of like the question “are we losing our freedoms”: If I look at what the gov’t is doing in the war on terror, it’s easy to think that it looks worse than ever, but then I look at how easy it was a century ago to railroad a criminal conviction, how much weaker our due process protections were, that we could force kids to pray in schools, ban unpopular speech, etc., I don’t know that things are really that much worse now.

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