Introduction

How can we make corruption as arduous as possible? How can we increase the transaction costs of corrupt deals? These questions are at the core of this chapter, which will employ new institutional economic thinking for an analysis of the microeconomic determinants of corrupt transactions. In spite of a growing interest in the economics of corruption, the tools of New Institutional Economics have hardly been applied to this topic. Noteworthy early exceptions are Husted (1994), Lambsdorff (1999), Lambsdorff et al. (2004), della Porta and Vanucci (1999), Vanucci (2000), and Rose-Ackerman (1999: 91–110).

This chapter argues that an institutional viewpoint can enrich our understanding of corrupt agreements. Central to the analysis are transaction costs, including the costs of searching for partners, determining contract conditions, and enforcing contract terms. Transaction costs of corrupt agreements differ from those of legal deals, because there is a need for camouflage and because partners in such a deal end up with potentially damaging information about each other. For these reasons, corrupt agreements are more likely to employ middlemen or come about as a by-product of legal exchange and social structures.