Corruption, Culture and Organizational Form

This paper examines the relationship between organizational form and the potential for corruption in two polar opposite cultural settings. We build a theoretical model of a licensing bureaucracy consisting of honest and dishonest officials, and study two types of corruption - collusion, where crooks try to bribe officials in order to pass bad projects, and extortion, where officials extort bribes from good applicants in order to process a good application. We examine two types of organizational culture - "competitive" culture, where officials monitor each other and pressure each other to behave honestly, and "cooperative" culture, where there is peer pressure from dishonest officials to cheat. We find that in the case of "competitive" culture, when peer relationships are strong, flat hierarchies are less prone to collusion, less prone to extortion and less costly to maintain than steep hierarchies. However, "cooperative" culture presents us with a trade-off: when peer relationships are strong, steep hierarchies are less prone to collusion and less prone to extortion, but flat hierarchies are less costly to maintain. We explore the implications of some reform policies aimed at reducing corruption