Affiliate & Associate

Research

On The Governance of Corrupt Exchange: How Citizens and Officials Build Social Ties to Reduce Corruption’s Transaction Costs

Abstract: This article provides evidence from the Congo that social relationships with state officials can decrease one social cost of corruption, in the context of public transport. We first document that police stops can lead to long bribe negotiations. In response, some drivers and officers have built relationships, allowing the drivers to take actions to attract passengers and negotiate passenger prices without the risk of being stopped, simply paying an unofficial set toll fee to the officers. We then examine a field experiment that re-routes drivers in randomly selected days to lines on which they do not have such ties. Re-routing decreases the surplus from driving (revenue minus repairs and gas). We cross-randomize third-party protection of the driver against police stops using existing common practices. The reduction of the surplus from re-routing is entirely driven by re-routing days in which the driver does not have such protection, thus the effect of re-routing is explained by driver-police interactions. We cross-randomize the time horizon of re-routing. When they expect to be re-routed only one day, drivers accept lower passenger prices and obtain less passengers, which leads to lower surplus, consistent with them trying to avoid detection by the officers. When they expect to be re-routed various days, drivers spend time negotiating with the officers and pay large bribes, destroying the surplus further, but yielding new relationships and higher revenue within three days. The findings suggest that relationships with state officials can form fast to reduce the transaction costs of the corrupt transaction and that these can amount to a very large social cost.

Working Paper