Tuesday, August 3, 2010

Stealing More by Stealing Less

Another great observation from William Easterly's "The Elusive Quest for Growth": centralized corruption will do better than decentralized corruption, both in terms of the country's productivity and the amount of money swindled.

If a government has too many corrupt officials all acting on their own accord, they will each "overfish," soliciting high bribes to maximize their own take without consideration for the well-being of other solicitors. Their victims, under constant threat of bribe solicitation, will spend considerable resources to avoid paying.

However, if solicitation can be handled in a central way, the victims may instead find it worthwhile to generate income and accept paying the more reasonably sized bribe.

Bribes are a form of taxation on income. Under centralized corruption, the effective "tax rate" is lower.

Easterly's point is the same as that put forth by the Laffer curve. The Laffer argument is that a government will collect more revenue with a tax rate of 30% than a tax rate of 90%, as the latter will ruin any incentive to generate income in the first place.