Tackling Corruption Hazards at the Source

Technical Notes

Dec 15, 2009 — Neil Boyle

Actions of people who are involved in designing and implementing project contracts are sometimes corrupt. Corruption in this context is subtle and not of the mafia organized crime variety. These corrupt acts arise from the constant human risk factors that beset all mankind and the variable environmental risk factors that come with all transactions. Learning to identify these factors at the level of the transaction may lead to improved contract design and implementation.

The key to tackling corruption at the source is to identify the constant human and environmental risk factors that lead to corruption, the effect that combining these factors has on incentive structure and the recognition that the kind of adaptation proposed vary with the type of hazards of opportunism. The constant contextual human risk factors are: bounded rationality (limited cognitive capacity of all humans) and opportunism (guileful self-interest).  The variable environmental factors are: small numbers exchange and uncertainty. When these are joined, bounded rationality and uncertainty give rise to an increase in the cognitive limitations of the parties who are involved and thus to increased propensity for corruption. The joining of opportunism and small numbers exchange gives rise to an increase in opaqueness and hence to some form of corruption. In sum, bounded rationality combined with uncertainty creates fertile ground for opportunism; likewise, opportunistic individuals combined with small number exchange conditions create fertile ground for corruption as well. These combined factors are referred to as “corruption markers.”

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