Perceived corruption frequency and size of corruption in economies

Purpose - – The paper aims to develop a theoretical model to explain the exact process through which the scale effect works to create a possible wedge between a perception-based ranking like the “Corruption Perception Index (CPI) ” and the axiomatic “absolute costs of corruption”-based ranking of economies with low enforcement against corruption. Design/methodology/approach - – The paper takes into account corruption both at the “high” and “low” levels of bureaucracies, where the bribes are paid sequentially at the two levels. The bribes are endogenously determined at the equilibrium using a sequential game approach. Findings - – The paper finds that in the absence of coalition between the two levels of bureaucrats, both the absolute level of corruption and the welfare level of the economies are expected to vary inversely with the perceived corruption frequency. The paper also explores the possibility of a stable coalition between the “high” and “low” level bureaucrats and shows that with the perception of a stable coalition being formed, the negative monotonic relation between the corruption frequency and the absolute size of corruption breaks down. Originality/value - – First, the paper argues that the ranking of the economies with low enforcement against corruption on the basis of perceived corruption frequency may not reflect the ranking of the economies according to their absolute size of corruption; it points out that the perceived higher corruption frequency in an economy as reflected in CPI can be an indicator of both the lower size of “high” level corruption and absolute size of corruption in the economy. Particularly, this happens in economies where coalition between the “high” and “low” level officials does not form. Second, it identifies the exact way in which the scale effect works to create a difference in the CPI ranking and the axiomatic “absolute costs of corruption”-based ranking and explains why similar difference would exist if “absolute costs of corruption”-based ranking is derived from all the sources of hard data on corruption. Third, it explains why a stable coalition between the “high” and “low” level bureaucrats in economies with low enforcement does not usually form.