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Does Grease Money Speed up the Wheels of Commerce?

By Kaufmann, Daniel

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Book Id: WPLBN0000001090
Format Type: PDF eBook
File Size: 0.1 MB
Reproduction Date: 2005
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Title: Does Grease Money Speed up the Wheels of Commerce?  
Author: Kaufmann, Daniel
Language: English
Subject: Economics, Finance & business, World Bank.
Collections: Economics Publications Collection
Publication Date:
Publisher: The World Bank


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Kaufmann, D. (n.d.). Does Grease Money Speed up the Wheels of Commerce?. Retrieved from


Introduction: The United States? Foreign Corrupt Practice Act (FCPA) of 1977 has made it a crime for American firms to bribe foreign government officials. In December 1997, the OECD member countries signed a convention that also criminalizes bribery of foreign officials by firms from the member countries.1 It went into effect in February, 1999, after it had been ratified by a sufficient number of individual parliaments of the signatory countries. Would laws of this kind reduce the incidence of bribery by multinational firms? Do they promote economic efficiency? Over thirty years ago, rather elegantly, the respected political scientist Samuel P. Huntington stated that ? terms of economic growth, the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is one with a rigid, overcentralized and honest bureaucracy.? (1968, p. 386) To paraphrase, excessive taxes and regulation on the books (nominal red tape) would remain excessive without bribery; but with the possibility of bribery, they may be transformed to less ?real? red tape (i.e., officials not enforcing all the rules and regulations in exchange for bribes). In other words, bribery is tantamount to deregulation. That view has not been an exception, and political scientists have not been alone over the past three decades in pointing out that, ethical considerations aside, corruption may in fact improve efficiency, particularly in developing countries. Indeed, theories that see some economic efficiency virtues in corruption have been published by some well-respected scholars in academic journals. Nathaniel H. Leff (1964, p. 11) stated in unequivocal terms, ?...if the government has erred in its decision, the course made possible by corruption may well be the better one.? A rigorous economic model published in the Journal of Political Economy (Lui, 1985) demonstrated the efficiencyenhancing role of corruption: in a queuing model, the size of bribes by different economic agents could reflect their different opportunity cost. Better firms are more able/willing to buy lower effective red tape. Hence, like an auction, a license or contract awarded on the basis of bribe size could achieve Pareto-optimal allocation. We label the theory that bribery leads to lower effective red tape as the ?efficient grease? hypothesis. If bribes ?grease the wheels of commerce,? then campaigns by governments or international organizations to combat corruption in the international arena, such as the U.S. FCPA or the OECD anti-bribery convention, would be counterproductive. We argue that this ?efficient grease? theory rests on a crucial assumption that should not be taken for granted. The assumption is that the red tape/regulatory burden (tax, licenses, delay, and so on) can be taken as exogenous, independent of the incentive for officials to take bribes. Because of the assumption, the theory is a partial equilibrium in nature, and may not hold in a general equilibrium.


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