The Review of Austrian Economics, 16:4, 363–379, 2003.
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Why is Corruption Tolerated?
ENRICO COLOMBATTO email@example.com
adiTorino and ICER, Corso Unione Sovietica 218 bis, 10134 Torino, Italy
Abstract. It is maintained that a closer analysis of the features of the underlying contract reveals that under many
circumstances corruption is in fact a rational and understandable reaction to institutional failures, which are often
far from accidental. Sometimes it can even be considered legitimate, when instrumental in achieving goals shared
by the vast majority of the electorate.
To this purpose, three different stylized institutional frameworks are analyzed: developed, totalitarian and
transition countries. The origin, scope and consequences of corruption vary signiﬁcantly across the different
frameworks. The normative conclusions should therefore be adjusted accordingly.
KeyWords: corruption, rent-seeking, discretionary power, institutions
JEL classiﬁcation: D73, B52, B53, D23.
1. Towards an Economic Theory of Corruption
The term “corruption” generally identiﬁes a transaction whereby an individual bound by
a formal principal-agent contract takes advantage of his discretionary power in order to
sell to a third party property rights that do not belong to him (Banﬁeld 1975, Jain 1998,
Murphy et al. 1993, Rose-Ackerman 1998).
This is typically the case of bureaucrats who
use their power to reduce costs for some operators, but at the expense of others. Or who can
raise the cost for individuals to interact with the state and are compensated for not doing
so: for instance, when government ofﬁcials demand extra payments before they enforce the
Of course, there also exist situations whereby the bureaucrat enjoys discretionary power
that he can rightfully exercise within set limits. Under these circumstances, corrupt be-
haviour occurs when authority is abused and the constraints violated. For instance, when
an ofﬁcial is required to use his own judgement in the public interest, but in fact pursues
his own personal advantage at the expense of the general well-being.
Surely, corruption does not belong to the public sphere only. The employee of a private
company who violates his contract with the employer or the shareholders in order to pursue
his own gain can also be considered corrupt. Nevertheless, it is not the same thing as shirking
or falling short of the assigned and agreed-upon goals. For neither shirking, nor professional
ineptitude imply a deliberate attempt to obtain one’s own interest by getting a third party
Although the above is neither particularly new, nor particularly worthy of note, the
economic analysis of corruption does not go much further. In particular, the literature
follows two main avenues of investigation. A ﬁrst category of contributions attempts to