Corrupt incentives exist because state officials have the power to allocate scarce benefits and impose onerous costs. Because scarcity lies at the heart of corrupt deals, basic insights derived from microeconomics can help structure efforts to reduce corruption. Some benefits and costs are not limited in amount, but public officials decide who gets the benefits or must bear the costs. For those allocations as well, economic analysis can provide insights. This chapter and Chapter 5 focus on incentive-based reforms that reduce the benefits or increase the costs of malfeasance. Chapter 6 discusses the criminal law as a deterrent. Here, we consider the following reform options.

1. • program elimination or legalization of payments,

2. • reform of public programs,

3. • reform of procurement systems, and

4. • privatization as an anticorruption tool.

Anticorruption measures must first locate where corruption takes place and identify the underlying incentives to pay and to accept payoffs. Reform efforts will be inefficient and wasteful unless the costs of corruption outweigh the costs of reform. We build on the previous chapters to outline the basic incentives for corruption and to set the stage for an assessment of alternative reform strategies.

The following incentives encourage corruption on the part of public servants: power over the distribution of a public benefit or the imposition of a cost, discretionary rather than rule-based decision making, low wages, lack of professionalism, lack of monitoring, low or ineffective punishment, lack of accountability, poor transparency, and the proportion of one's peers who are (perceived to be) corrupt. On the demand side, the high costs of government policies – both regulations and taxation; complex or confusing rules; the desire to limit competition; and acquiring valuable government contracts are all incentives to engage in corruption. In addition, those who commit crimes may also seek to make payoffs to avoid arrest and prosecution. In short, individuals will seek to minimize the costs imposed on them by government, while firms try to maximize profits. It is difficult to estimate the relative importance of each of these factors, but as Klitgaard (1988: 75) writes, corruption is more likely when a public official has monopoly power over a service combined with discretion to exercise that power and a lack of accountability. Although an oversimplification, Klitgaard's formulation highlights situations in which corruption is likely to occur when several risk factors occur together.