In a recent survey, Nigerian respondents indicated that most of their
national institutions were corrupt (Figure 1). Why is corruption so
pervasive in Nigeria? Corruption is not an irrational act – if it were,
we would have to conclude that majority of Nigeria’s entire political
and public service class is insane. Corruption is a calculated,
measured and deliberate decision. It often requires meticulous planning
that can involve long drawn out schemes like padding budgets, setting up
fake companies, identifying fronts, coming to contractual terms with
the fronts on what portion of the loot will be retained by them, masking
investments & bank deposits as well as sabotaging audits and
project completion assessments.
While corrupt officials – political and civil servants – know the
benefits that they stand to make from engaging in corrupt activities,
they also understand the cost of being caught. The fact that majority of
these officials decide to proceed with corruption means that they
believe the benefits far outweigh the costs.
If there is indeed such a rational thought process taking place when
corruption is being contemplated, what does it tell us about the
Nigerian situation and what it will take for corruption to be
eradicated? In this article, results from a corruption focused survey of
Nigerians and concepts from rational choice theory are used to explain
why corruption pays in Nigeria.
Rational Choice Theory
The body of knowledge that deals with how human beings evaluate risk
and uncertainty when making decisions is generally referred to as
Rational Choice Theory. This is a mature field that incorporates
economics and psychology into a common framework that helps us
understand how a decision makers frames economic decisions that have
some risk and uncertainty associated with them (e.g., medical
procedures, corruption, games of chance, business transactions, etc.).
The field has been advanced by insights from a number of leading
researchers, amongst whom are several Nobel laureates (e.g., Herbert
Simon, Daniel Kahneman, etc.). Rational choice theory has been applied
to understand issues as diverse as the behavior of stockholders,
economic cycles of boom and bust, criminal behavior, and a host of other
behaviors.
The Benefits of Corruption
Every corrupt activity starts with a certain amount of wealth (W)
that can be stolen. When the perpetrator determines to corruptly enrich
themselves, there is a probability (P) associated with whether or not
the corrupt activity will be successful. If the corrupt person is for
example, a Governor responsible for a state’s budget, or a Director in
the Ministry, responsible for implementing a particular budget item,
they call the shots and the probability that the corrupt action will be
successful is 100%. If the perpetrator was an accountant without
executive authority who is trying to steal by trying to cook the books,
the probability of success will be less than 100%. This is because the
success of their actions will depend on other factors beyond their
control such as lack of external audits, inadequate assessment of
project completion, etc.
Choice theory is based on simple and intuitive concepts. It assumes
fundamentally that given an option, W, which has a probability of
occurrence, P, the expected benefit from selecting that choice is given
by the multiplication of the option, W and the probability P.
In simple mathematical terms, the expected benefit from the corrupt action is given by the formula:
Expected Benefit = Wealth (W) x Probability of Successful embezzlement (P) = W x P
The Costs of Corruption
The costs of corruption, C, refers to the penalty that is associated
with the discovery and prosecution of corrupt practices. The costs are
dependent on two things: (i) the likelihood that the corrupt action will
be uncovered, exposed and filed for prosecution, and (ii) the
likelihood that the corruption case is successfully prosecuted in the
courts and an adequate punishment is meted out to the perpetrators.
The probability, P' that the costs of corruption will occur is quantified as:
Probability of cost (P') = Probability of exposure & prosecution (P2) X Probability of successful prosecution (P3).
Just like the case for the expected benefit, a similar quantification
of the expected cost of corruption can be determined. The cost of
corruption can range from serving a prison term, to forfeiture of the
proceeds of corruption, publish shaming, family dishonor, professional
& career damage (e.g., disbarment for lawyers, or loss of licensure
for accountants and engineers).
Given a Cost, C, with a probability of occurrence, P', the expected cost of corruption is given as:
Expected Cost = Cost of Corruption (C) x Probability that the cost will occur (P') = C x P' = C x P2 x P3
Expected Cost = Cost of Corruption (C) x Probability that the cost will occur (P') = C x P' = C x P2 x P3
By subtracting the expected cost from the expected benefit, the net
benefit of the corrupt action can be determined. In this case, we can
mathematically state that:
Expected Net Benefit = Expected Benefit - Expected Cost = W x P - C x P'
Whenever the Expected Net Benefits are greater than zero, the choice
is one that a rational decision maker is expected to make. If the
Expected Net Benefits are negative, the rational thing to do is to turn
down the option because the costs far outweigh the benefits.
Nigerians speak on costs of corruption
In order to obtain quantitative values for the probabilities to be
used in assessing the expected net benefits for corruption in Nigeria,
we asked respondents to assess the likelihood that corrupt officials
would be exposed and arrested (see Figure 2). Based on the responses, a
weighted average value can be determined which indicates that Nigerians’
perception of the probability that a corrupt official will be exposed
and arrested is 31%.
Figure 2: Majority believe the likelihood that corrupt officials will be exposed and arrested is low
We also asked respondents to assess the likelihood that corrupt
officials would be successfully prosecuted in the courts (see Figure 3).
Based on this result, Nigerians’ perception of the probability that a
corrupt official will be successfully prosecuted is 21.5%.
Figure 3: Majority believe the likelihood that corrupt officials will be successfully prosecuted is low
Corruption Case Studies:
Now that we have a decent handle on rational decision theory we will
apply the concept to two hypothetical corruption cases. Results from the
survey will be used for ascribing the probabilities needed for the
expected net benefit estimations.
Case 1: Current Enforcement Regime (P2 = 31%, P3 = 21.5%)
A 45 year old Director General in the Nigerian Civil Service earns
N8m annually (including allowances, rent and home ownership subsidies
and other emoluments). He has the opportunity to corruptly enrich
himself to the tune of N10 m. If caught, he will suffer reputational
damage for the rest of his life, spend some time in jail and lose his
pension entitlements. He estimates that the losses he will suffer if
caught and prosecuted will come to about N5 m annually. These losses can
be calculated as a perpetuity, which at an assumed 10% interest rate
gives estimated lifetime losses of about N50 m. He estimates that there
is a 31% chance that he will be caught, and a further 21.5% chance that
he will be successfully prosecuted. Should he corruptly enrich himself?
Answer: Yes, corruption pays! The Expected Net Benefit is positive (+N6.7 m).
Probability of getting embezzled amount (P1) = 100%
Probability of getting caught (P2) = 31%
Probability of getting prosecuted successfully (P3) = 21.5%
Estimated Lifetime Cost (C) = N50 m
Gains from Corrupt enrichment (W) = N10 m
Expected Net Benefit = P1 x W - P2 x P3 x C
Expected Net Benefit = 100% x 10 m - 31% x 21.5% x 50 m = 10 – 3.3 million = N6.7 m.
Case 2: High Enforcement Regime (P2 = 50%, P3 = 50%)
Consider the case of the same civil servant. Assume that now the
enforcement and judicial environment is radically different. The
government has instituted a policy that rewards whistleblowers who
report corrupt officials with 2.5% of the total embezzled amount. There
is also a 2.5% bonus reward that goes to the lawyers who prosecute the
cases if there is a successful conviction. These developments have
caused the probability of getting caught to increase to 50% and the
probability of getting prosecuted to increase to 50%. Should the Civil
Servant still corruptly enrich himself in this new scenario?
Answer: No, corruption does not pay! The Expected Net Benefit is negative (-N2.5 m).
Probability of getting embezzled amount (P1) = 100%
Probability of getting caught (P2) = 50%
Probability of getting prosecuted successfully (P3) = 50%
Estimated Lifetime Losses (C) = N50 m
Gains from Corrupt enrichment (W) = N10 m
Expected Net Benefit = P1 x W - P2 x P3 x C
Expected Net Benefit = 100% x 10 - 50% x 50% x 50 m = 10 - 12.5 = -N2.5 m.
3 Public Policy Implications for Nigeria
While these examples are hypothetical, the implications are clear –
corruption will continue to thrive because the perceptions that
Nigerians hold of the likelihood for exposure and prosecution are low.
Their views are supported by the facts. For instance, none of the high
profile cases that have been prosecuted since the inception of the
Buhari government has been successfully prosecuted.
Here is the good news - the same survey indicated that Nigerians
overwhelmingly support a stronger enforcement regime than what is
currently in place (Figure 4). One striking feature of the survey
responses was that none of the respondents believed that the current
enforcement climate was adequate.
The self-interest of people and the proven rational basis for much of
human behavior can actually be used as tools for cracking down on
corruption. Rational decision theory suggests that if corruption is to
be tackled effectively public policy must focus on three areas: (i)
increasing the likelihood of getting caught, (ii) increasing the
likelihood of prosecution and (iii) raising the penalties borne by
corrupt officials.
Figure 4: Majority believe that stricter laws are needed to curb corruption
Figure 4: Majority believe that stricter laws are needed to curb corruption
(i) Encourage whistleblowers so that the likelihood of catching embezzlers increases: There
is always a long line of clerks, messengers, cashiers, accountants,
personal bankers and auditors that are privy to every single act of
corruption. Right now, these people keep quiet because there is no
incentive to make them come forward with the information that they have.
Imagine what would happen if a law was enacted that guaranteed a reward
of 2.5% of the recovered proceeds of corruption to a whistleblower (the
payout should probably be capped at N10m or so, otherwise the
incentives become perverse). It is certain that the authorities would be
inundated with all types of information about corrupt activities. As a
consequence the likelihood that corrupt officials will be reported
should increase, thereby increasing the costs to the perpetrators of
corrupt activities.
(ii) Provide Incentives to Lawyers so that the likelihood of successful prosecution increases:
Even where corrupt officials are arrested, we have seen situations
where trials drag on forever, or the officials are let off the hook
because of the ineptitude and sloppiness of the lawyers charged with
their prosecution. To get prosecution rates up, it will be prudent to
provide an incentive that rewards the successful and timely prosecution
of cases. Guaranteeing some portion of the recovered sums to successful
prosecutors could help in this regard. In the corporate world, where
shareholders are faced with what is called the Principal-Agent problem,
the commitment of the CEO and other executives to making sure that their
(the executives') focus is on growing shareholder's wealth is secured
by making stock options part of the compensation package. If the stock
does well, then the executives benefit as well.
(iii) Increase the penalties associated with corruption:
As the cases suggest, a critical element that determines the expected
net benefit (or loss) of corruption is the magnitude of the lifetime
loss suffered. In all the instances considered, if the lifetime losses
had been more extreme, the expected net benefits of corrupt activity
would have greatly reduced. Some of the steps that could be taken from a
public policy perspective to increase the costs to the perpetrators of
corrupt activities includes severely restricting the economic
opportunities available to people convicted of corruption. For instance
professionals like lawyers, doctors, and engineers who have been
convicted of corruption could be stripped of their charters and/or
licenses. Convicted embezzlers could be excluded from participation in
the stock market and politics, and onerous forfeiture requirements could
be imposed to make the lifetime losses large and significant. As the
survey results indicate, Nigerians are even prepared for penalties as
drastic as capital punishment to be prescribed as punishment for
corruption.
Conclusion
Nigerian officials are corrupt because given Nigeria’s current law
enforcement and judicial climate, corruption has a net positive payback.
If anything is to change, then the enforcement regime must become
stricter and less forgiving of corrupt activity. Rational choice theory
provides a means for devising the policy instruments that can enable us
effectively tackle the menace of corruption.
Dr. Malcolm Fabiyi coordinates the Governance Advancement Initiative for Nigeria (GAIN). You can follow him on Twitter @malcolmfabiyi and reach him at mef222@gmail.com.
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