Corruption sometimes fosters regulatory compliance, new study shows

May 07, 2013

(Phys.org) —Inspired by a personal experience, a University of Arkansas economist examined the relationship between corruption and regulatory compliance – on both a theoretical and empirical level – and found, surprisingly, that corruption in some circumstances actually fosters regulatory compliance.

"What I found was that whenever public agents who control monitoring are paid a fixed wage – and that point is critical – an increase in corruption may actually foster regulatory compliance," said Fabio Mendez, associate professor of economics in the Sam M. Walton College of Business. "How is this possible? It happens because the prospects of obtaining a bribe drive corrupt public officials – whether it's a or a food inspector or a tax regulator – to monitor firms with greater intensity. That is, if those agents think they could make a little extra money, they'll work harder, and when firms – or people, for that matter – are monitored with greater intensity, they find it optimal to comply with regulations."

Mendez, who studies corruption in general, conceived the idea for this study while on vacation with his wife outside the United States. Driving to a beach, he saw a policeman – presumably paid a fixed wage – napping in a patrol car. Confident that he would not get pulled over, Mendez sped up and exceeded the speed limit after passing the patrol car. Later, while returning from the beach, Mendez exceeded the sped limit again and was stopped by a different officer, who, after much explanation about how difficult it would be for Mendez to resolve the matter, essentially asked for a bribe.

It occurred to Mendez later that under circumstances such as this, might be more motivated to comply with laws and regulations if they knew they would have to deal with a corrupt official.

Which is counter to the prevailing assumption about corruption. It is generally assumed that corruption – in government and business – discourages or erodes regulatory compliance. In other words, if citizens know that their government officials accept bribes, then it is more likely that those citizens will feel justified or comfortable disobeying laws and regulations. In fact, many legal and economic studies overwhelmingly support this notion – that regulatory compliance decreases in the presence of corruption. But Mendez's study showed this isn't always the case.

His findings were the same on both a theoretical and empirical basis. Mendez first developed a theoretical model upon which compliance might increase under corrupt conditions. In the model, public officials monitored the actions of private firms that must adhere to government regulations. Firms chose whether to comply with the regulations depending on the monitoring rate they faced and the incidence of corrupt officials. And, depending on the existing level of regulatory compliance, public officials chose the degree of monitoring effort and their willingness to accept bribes. The model merely showed that it was possible for corruption to foster compliance.

In the empirical study, Mendez used firm-level data from the World Bank's Business Environment and Enterprise Performance Survey, which includes information about 4,100 private firms in 26 "transition" countries. Primarily Eastern European, transition countries are those that are changing from a centrally planned economy to a free market economy. The survey examines interactions between the firms and the state regulatory agencies that monitor them. It contains detailed information regarding bribes paid to government officials and the purposes for which they were paid. Specifically, Mendez focused on compliance with regulations requiring firms to pay sales tax and the bribes these firms paid to avoid paying the taxes. At the firm and industry level, the data corroborated the theoretical findings and showed that corruption was positively correlated with compliance.

"I guess you could say 'encourages' or 'promotes' compliance, rather than fosters," Mendez said, "but I don't want to give the impression that corruption is a good thing. This study simply shows that it is possible under certain conditions for to increase compliance, and I think the findings are important because they might compel organizations to evaluate how they pay employees."

Mendez's study was published in Public Choice, a research journal that explores the intersection of economics and political science.

Explore further: Facial selection technique for ads can increase buyers by 15 percent

add to favorites email to friend print save as pdf

Related Stories

Policy Reforms May Increase Petty Corruption

May 26, 2008

A study in the International Journal of Economic Theory published by Wiley-Blackwell finds that certain proposed reforms intended to reduce petty corruption can actually have the opposite effect and increase the occurrence of cor ...

Study finds link between political corruption and FEMA money

Dec 11, 2008

Where natural disasters strike, political corruption is soon to follow, say the authors of a study in the Journal of Law and Economics. But it's not the wind and rain that turns good folks bad; it's the money that floods ...

Corruption drops as incomes rise: study

Jan 18, 2012

Corruption is higher in countries with lower incomes according to Victoria University research that compared changes in levels of corruption in 59 countries over nearly 30 years.

Recommended for you

Sharing = Stealing: Busting a copyright myth

Apr 11, 2014

Consumers copy and share digital files. This has been blamed for a potentially catastrophic decline in certain markets. But why do consumers copy? And is it as economically harmful as often thought?

How widespread is tax evasion?

Apr 10, 2014

Tax evasion is widely assumed to be an eternal problem for governments—but how widespread is it? For the first time, a new study, co-authored by an MIT professor, has put a cost on a particular kind of tax evasion, known ...

China looks to science and technology to fuel its economy

Apr 10, 2014

Maintaining stability in the face of rapid change and growth, and proactively partaking in cooperative global ties in science and technology fields will be key in helping China become an innovation-based economy, according ...

User comments : 0

More news stories

Online reviews: When do negative opinions boost sales?

When purchasing items online, reading customer reviews is a convenient way to get a real-world account of other people's opinions of the product. According to a new study in the Journal of Consumer Research, negative review ...

ESO image: A study in scarlet

This new image from ESO's La Silla Observatory in Chile reveals a cloud of hydrogen called Gum 41. In the middle of this little-known nebula, brilliant hot young stars are giving off energetic radiation that ...

First direct observations of excitons in motion achieved

A quasiparticle called an exciton—responsible for the transfer of energy within devices such as solar cells, LEDs, and semiconductor circuits—has been understood theoretically for decades. But exciton movement within ...

Patent talk: Google sharpens contact lens vision

(Phys.org) —A report from Patent Bolt brings us one step closer to what Google may have in mind in developing smart contact lenses. According to the discussion Google is interested in the concept of contact ...

Warm US West, cold East: A 4,000-year pattern

Last winter's curvy jet stream pattern brought mild temperatures to western North America and harsh cold to the East. A University of Utah-led study shows that pattern became more pronounced 4,000 years ago, ...