Laws against bribery, extortion, and self-dealing are necessary, but will never be sufficient to deal with widespread corruption. The previous chapters have argued that fundamental redesign of the relationship between state and society is needed to control systemic corruption. Nevertheless, well-designed and enforced laws against bribery and extortion are a necessary backup to any broader reform, and economic analysis can contribute to the assessment of their operation and effectiveness. That is our focus in this chapter.

All countries draw the line somewhere between illegal bribery and acceptable “gifts of good will,” and we will discuss the difficulties of making that distinction in Chapter 7. Here, we take that judgment as given and seek effective deterrence strategies using the criminal law. The sanctioning strategies that are consistent with economic analysis often differ from the actual legal penalties, even in developed countries. A law and economics approach focuses both on improving the deterrent effect of arrest and punishment and on providing incentives for people to come forward with documentation of corrupt deeds. One conundrum for anticorruption efforts is the possible tension between the goals of signaling credible expected punishments and using the law to induce perpetrators to provide evidence.

Given the costs of law enforcement, the optimal level of corruption is not zero, even if society values the bribers’ benefits at zero. Once one takes the costs of prevention into account, the level of deterrence expenditures should be set where the net benefits are maximized, that is, where marginal benefits equal the marginal costs (Becker and Stigler 1974; Rose-Ackerman 1978: 109–19). A higher level of deterrence would not be worth the extra costs; a lower level would sacrifice the net benefits of increased enforcement. For example, a recent audit of expenses claimed by Canadian senators revealed CAD840,000 in questionable expenses (less than 1% of the annual budget); the inquiry cost CAD24 million. Obviously, the benefits go beyond the money recovered, insofar as the findings may drive political change, deter future malfeasance, or bolster the political standing of those who ordered the audit, but on a cost-effectiveness basis, this audit was not worthwhile.

The deterrence of criminal behavior depends on the probability of detection and punishment, and on the penalties imposed – both those imposed by the legal system and more subtle costs, such as shame or loss of reputation (Becker 1968).