Corruption and individual ethics Insights from a public

procurement auction

Nikolaos Georgantzís

University of Economics in Bratislava&

Agriculture Policy and Development University of Reading

What do we know on corruption?

What do we know on corruption?

Let us check on “Transparency International”

What do we know on corruption?

http://www.transparency.org/cpi2013

What do we know on corruption?

http://www.transparency.org/cpi2013

Difficult to study (many things on) corruption due to 1.Observability problems2.(under-)Over-reporting in (dis-)honest countries

Corruption against progress

Some figures on what we know•Estimated cost €447 billion in 2010 for the

EU.

• In 8-country (Fr, Hu, It, Lt, NL, Pl, Ro, Es), 5-sector study (in m€): Road & Rail, 500-750; Water & Waste, 27-38; Urban utility & Construction 830-1141; Training, 26-86; R&D, 99-228.

•Types of corruption: 57 cases of Bid Rigging; 35 of Kickback (bribes), 22 Conflict of interest, 5 Mismanagement.

Typical example of Kickback

•A public administration publishes tender for the construction of two buildings. The winning company received €600.000 to privide technical advice and control. Other private companies had presented offers to do this for €400.000(!).

•Corruption-related cost overrun calculation: 50% ([600-400]/400)

Experimental literature and framework

• Abbink et al. (JLE&Org. 2002), Abbink (EJPE 2004), Abbink and

Hennig-Schmidt (ExpEco 2006): Exogenous externality, Partners vs

Strangers, Neutral vs Loaded instructions

• Cameron, Chaudhuri, Erkal and Gangadharan (JPubE 2009):

Punishment of Corrupt Behavior: Experimental Evidence from

Australia, India, Indonesia and Singapore

• Barr and Serra (ExpEco 2009, JPubE 2010): Framing and culture

matter

• Ryvkin and Serra (JEBO 2012): bargaining between citizen and officer

• Burguet, R., & Che, Y. K. (RAND 2004). Competitive procurement

with corruption

• Büchner et al. (PublicChoice 2008): Procurement auction; data in line

with theory

• Sanfey et al (Science 2008): Neural basis of economic decision

making in Ultimatum games

Three studies on corruption

Theoretical model

Monetary payoffs implemented in the experiments

Monetary AND Psychological-Ethical Payoffs

Generalized predictions

Study 1: The basic behavioral patterns

• LINEEX at University of Valencia

• Sample: 66 subjects (30 men)

• Random groups of 3 in 2 Treatments: Partners (1 session) vs

Strangers (2 sessions)

• Anonymous, no communication

• 10 rounds

• Half-loaded instructions (“Firm”, “Town Planner”, “Project Quality”, but

not “bribe” )

Results

What about Town Planners?

Town planners’ choices (over 2/3 of them compatible with γ<1/2)

Town Planners’ behavior slightly more pro-social in strangers matching

What about Firms?

Firms’ choices (modal choice compatible with γ=1/2)

Firms’ behavior relatively stable over time

Subjects are not just maximizing monetary rewards: They feel some aversion to bribery

Staff rotation as anti-corruption mechanism:”Strangers” matching mitigates corrupt behavior

Conclusion I

T0: 15 rounds of Baseline (T0: Partners) + 15 rounds with NEW STAGE

Firms not obtaining the license can “blow the whistle” to inspect for corruption (any positive bribe, B>0)

Study 2: Adding extrinsic and triggering intrinsic motivations

T1: [15 rounds Baseline + 15 rounds of NEW STAGE] + NEW PLAYER

A receiver of the consequences of the potentially corrupt transactions:

Design

Study 2: Lab procedures• 1 session, 77 subjects:

– 44 firms– 22 Town planners– 11 citizens

•4 treatments (Partners matching protocol)– T0: baseline – T0w: whistle-blowing– T1 baseline + citizen– T1w: Whistle-blowing + citizen

• Other-regarding Preferences from a Modified Dictator Game by Blanco et al. (2011)

•Risk preferences from Lotteries by Sabater-Grande and Georgantzis (2002)

Results

Town planners’ choices (initially, ¾ of them compatible with γ<1/2; with whistle-blowing less than 25% of them)

Firms’ choices(initial modal choice compatible with γ=4/3; with whistle-blowing, modal γ is infinite)

Evolution of bribe

Evolution of average bribe before and after suing option is available

Whistle-blowing frequency

The existence of a citizen increases firms’ psychological cost from γ=4/3 to γ=2

Risk aversion and bribing

Other-regarding preferences

Gender

Efficiency

New institutions improving social efficiency:

The whistle-blowing institution and empathy towards citizens decrease bribes

Conclusion II

Study 3: Physiocorruption

Some hints concerning physiology:Affective space

Russell, 1980; Watson y Tellegen, 1985; Bradley y Lang, 1994; Feldman, 1995

Electrodermal activity

Electrodermal activity

Anticipating risk in a gambling task

Bechara, Damasio et al, 1997. Deciding Advantageously Before Knowing the Advantageous Strategy. Science — approximately 2000 citations!

Emotional arousal and tax evasion

•Coricelli et al. Cheating, emotions, and rationality: an experiment on tax evasion, Experimental Economics (2010), Journal of Economic Psychology (2012):

The intensity of anticipated and anticipatory emotions before reporting income positively correlates with both the decision to cheat and the proportion of evaded income. The experienced emotional arousal after an audit increases with the monetary sanctions and the arousal is even stronger when the evader’s picture is publicly displayed.

Physiolab• Continuous EDA was recorded using BIOPAC MP150 system and a TEL100-RF telemetry module (BIOPAC systems, Inc). The BIOPAC amplifier applies a constant voltage (0.5 V).

• An endogenous trigger protocol was programmed to communicate the important “moments” of the experiment from z-Tree to the bio-data collection software.

• Two Ag/AgCl electrodes with 1 cm circular contact area pre-filled with isotonic gel were attached on the subject’s hypothenar eminence of the non-dominant hand.

• Prior to SCR detection, the skin conductance signal was low-pass filtered at 0.5 Hz and smoothed using a moving average filter with a 2 sec span.

Physiolab

Electrodes

Physiolab

Photodiodes

Study 3: Corruption and emotions

•Implementing the “T0-then-T0w” treatment

•90 subjects: 44 women and 46 men

•Average quality:

Treatment baseline:

men: 7.42

women: 7.22

Treatment whistle-blowing:

men: 9.17

women: 9.23

Behavioral Results

Initially, over 4/5 of the town planners’ choices compatible with γ<1/2; with whistle blowing, less than half of them is

Whistle-blowing

Bribe evolution

Efficiency

Physiological Results

Skin conductance: Firms’ decisions (BASELINE)

Skin conductance reaction of firm subjects during post-decision seconds (Baseline treatment):

“Ethical” Firm-subjects’ SCR reveals extra arousal

Skin conductance: Town Planners’ Decision (BASELINE)

Skin conductance reaction of town planner firm subjects during post-decision seconds (Baseline treatment):

“Ethical” Town Planners’ SCR reveals extra arousal

Skin-conductance: Firms’ decisions (WHISTLE-BLOWING)

Skin conductance reaction of firm subjects during post-decision seconds (Whistle-blowing treatment):

“Corrupt” Firm-subjects’ SCR reveals extra arousal

Skin conductance: Town Planners’ Decision (WHISTLE-BLOWING)

Skin conductance reaction of town planners during post-decision seconds (Whistle-blowing treatment):

“Corrupt” town planners’ SCR reveals extra arousal

An explanation of the emotional patterns

•In Baseline treatment, those who choose not to bribe (109, vs. 761 bribe choices) have intrinsic motivations against pure monetary profit maximization.

•In Whistle-blowing treatment, extrinsic motivation is added through the punishment threat. Now, those who still bribe (269 choices against 631 with no bribe) are the ones deciding against their pure monetary interest.

•CLAIM: It has been often conjectured that deviations from the selfish Homo Oeconomicus is due to emotional (as opposed to rational) motives. Here, deviations from selfish monetary reward maximization seem to be reflected on subjects’ emotional arousal.

Firm-subjects’ SCR while waiting for whistle-blowing decision (WHISTLE-BLOWING)

Winners’skin-conductance while waiting for loser to decide whether to blow the whistle (whistle-blowing treatment):

“Corrupt” winners’ SCR reveals extra arousal

RESPONSE TIMES

•Ariel Rubinstein. "Instinctive and Cognitive Reasoning: A Study of Response Times." The Economic Journal 117 (2007): 1243-1259.

• “It is suggested that choices made instinctively, that is, on the basis of an emotional response, require less response time than choices that require the use of cognitive reasoning.”

Response times and SCR

In all cases, higher arousal captured by subjects’ SCRs, coincides with higher decision times:

We confirm the conjecture that more instinctive decisions (generating or resulting from less conflict) are made faster.

RESPONSE TIME CONCLUSION

•Physiological results: Bribing in baseline and NOT bribing in “whistle-blowing” treatments are the (instinctive) money-maximizing benchmarks. The deviations from them are less instinctive and derive from a more emotionally/cognitively charged decision process.

•As Rubinstein: slower decisions are associated to increased cognitive processing. Together, cognitive processing and emotional activation (for example due to moral dilemmas) can help us gain a better understanding of reaction times in decision.

•The novelty of this with connection to Rubinstein’ s work is the clear link between arousal and response times.

Decisions causing a higher excitement are those taking more time to be made!

General conclusions • People have home-grown values which

can be captured by abstract laboratory settings

• We can obtain even precise values of the psychological costs associated to ethical values

• The physio-lab can provide us with objective somatic reactions to decisions involving ethical conflicts

• Time responses may offer a low-cost substitute for SCR-based emotional arousal data

Comments welcome!