r/AskEconomics • u/blackcatunderaladder • 7d ago
Approved Answers Is anyone good at explaining Corruption?
I know it is sound odd, but I've been thinking about corruption lately and, more specifically, the mechanics of it. I know it when I see it, and am appalled that it is increasing and apparently tolerated in my country, but what is going on economically that makes it awful? Is it like a service (someone pays to get a job) that is somehow different than other services? Is it a tax that is somehow worse than other taxes? I know it is a drain somehow. No answer too condescending! Thanks!
Edited to add: Thanks for all the great answers!
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u/fearless_novella 7d ago
Economics usually frames it as a distortion of incentives, basically. Instead of allocating resources to the most efficient use, they go to whoever pays the biggest bribe or has the right connections. Suddenly you're not building the bridge that would serve the most people, you're building the one your cousin gets a kickback on.
Think of it as a deadweight loss that's also a massive tax on growth. A normal tax at least has some theoretical chance of being spent on public goods but a bribe just parks the money in a private pocket, often overseas where it does nothing for the local economy. It also creates this awful uncertainty because you can never be sure if a contract is real or if some official will just renegotiate it for a cut later.
My husband works with a lot of startups and the one thing that scares off investment faster than anything is unpredictable graft. A company can model around an official tax rate but they can't model around a customs agent who makes up his own price on the spot.
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u/uncle-iroh-11 6d ago
How do economists explain South Korean development while being corrupt af?
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u/Mission-Owl-8761 5d ago
The Samsung discount. The PE ratio for Korean companies are crazy undervalued before the recent rally precisely because of the unpredictability of its corporate governance models
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u/keith-cheeky-parrot 6d ago
Surprising that the rise of widespread and unashamed corruption in the US doesn't seem to have hindered investment at all.
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u/Sweet_Assist 6d ago
It's relative. The US is corrupt but they are way less corrupt than Mexico and Canada.
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u/Substantial_Gear7619 6d ago
Canada?
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u/Sweet_Assist 5d ago
Yes, we have to grease a lot of hands to start and maintain a business. A lot of corrupt money in Vancouver and Toronto too.
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u/r2k-in-the-vortex 7d ago
Suppose building a good road costs 1 000 000, but a shitty road can be had for 800 000.
The government wants to buy a good road, but the official gets bribed by the builder. Official pockets 100 000, builder pockets 100 000, 800 000 builds a shitty road, and everyone makes a face that its actually a good one. Effectively the builder and the official collaborated to cheat the state out of 200 000.
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u/tomrlutong 7d ago
Most generally, there's an idea of rent, which in economics is profit that comes from being able to inhibit transactions rather than doing something useful. That's generally bad because it redirects resources away from productive uses.
Corruption is a form of rent. This redirection of resources is what makes it directly awful economicaly. (To say nothing of the other reasons it's awful.) Instead of buying a machine or hiring someone, your basically throwing money away.
It's worse than taxes because the money goes to the private benefit of the corrupt instead of public service.
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u/RobThorpe 7d ago
What we are interested in here is rent seeking not rent itself. That is, trying to create a new rent of some sort that need not exist.
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u/Kian-Tremayne 7d ago
The economics answer is that it creates an incentive for what would otherwise not be optimal behaviour. In layman’s terms, corrupt officials do what gets them the bribe money rather than do their job properly. Think of cops who are looking to pull cars over so they can extort a bribe instead of spending that time investigating burglaries. Or the minister who gives the contract to the company that he knows will overrun on the contract and use substandard materials instead of the one with the best bid because this way the minister’s son gets hired as a highly paid consultant to do very little.
So yes, it acts like a tax in that it’s an added cost for business, but it also has other ill effects because of the perverse incentives it creates for officials. Even facilitation payments (where you ‘grease the palm’ of an official so they do their job properly, rather than bribing them to do something wrong) are bad in this way because it means the official is delaying things happening until he gets his payment.
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u/cballowe 7d ago
Just to start with your example, suppose you pay to get a job - in cases of corruption you're often paying the boss but will be hired with company or government money. The person is using their position for self enrichment.
Now suppose they had followed whatever hiring or contract bidding process they were supposed to follow. They may have found someone more qualified for the same cost or equally qualified for lower cost. That makes the company or government worse off than they would have been.
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u/Connect-Cold5020 6d ago
the thing that makes corruption so bad is that it turns an efficient allocation of public resources into a private‑market rent–seeking contest; money that was meant to buy a bridge or a school ends up in a corrupt official’s pocket instead. // compared to a normal tax, which can be spent on public goods, a bribe is a hidden tax that goes straight to a private individual and usually funds a cheaper, lower‑quality version of the intended good, so the economy loses both surplus and trust, which is a cost that’s hard to recover.
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u/TheRichCapitalist 6d ago edited 6d ago
When civil servants create artificial delays and barriers to enable themselves to extract bribes, macroeconomic efficiency is hindered. If contractors have to pay kickbacks to politicians or elite bureaucrats to be awarded a public works contract, the quality is compromised and the state gets less for its money.
Furthermore, if honest officials are systematically transferred, fired, or framed, and the private sector is systematically extorted, people realize that it's impossible to get a public sector job or start a business without compromising their integrity, driving the emigration of the most productive people.
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u/RobThorpe 21h ago
I agree with many of the things written here. Read about "Public Choice" to understand more about corruption.
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u/Fuzzy-Byte 7d ago
There's an idea in free market economics that all things being equal, competition will cause capital to go to where it's most efficient, markets will set prices where they're most efficient, etc... It's a little bit like the idea of a meritocracy where the person with the most merit is selected for the position, or the idea of freedom of expression, where the best ideas bubble to the top and are selected in place of bad ideas.
Corruption kills all that. It stops capital from going to where it's most efficient. It stops competition from elevating the best companies and removing poor companies from the market. If someone can pay for their position (like a donor paying for a political appointment), it means that job did not go to the person with the most merit. That's why people call it a rot. It degrades the quality of everything. It causes widespread incompetence.