Chapter 7: Corruption in state administration
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Fighting corruption requires careful analyses of its underlying causes and consequences. This chapter provides an economic analysis of corruption as a trade in decisions that should not be for sale. The size of the bribe and the consequences of corruption are functions of the bargaining powers of those involved. We suggest ways to re-organize decision-making procedures to reduce the risks of corruption but stress the difficulty of breaking up entrenched collusive environments. Furthermore, even if corruption in a public institution is well recognized, it may not be possible to identify individual offenders. The question then is whether one should sanction the entire public body. Like private entities, public institutions can be encouraged to self-police and self-report (for example upon information from a whistleblower) if such steps will reduce the extent of some penalty. However, the criminal and administrative monetary sanctions applied to private sector entities are a poor fit for state institutions with on-going responsibilities to the citizenry. We propose non-monetary penalties, including intensified external monitoring, reorganization of authority, disqualification of leaders, and the removal of service provision responsibilities.

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