Corruption is the method government officials implore to extract rents from businesses. This paper uses the functionalist-modernization theory of corruption to examine governmental corruption. The primary argument is that the functionalist-modernization approach is the most efficient method of controlling corruption. The market approach to corruption argues that corruption is inevitable in a modern economy. Since corruption cannot be eliminated, the market approach focuses on how to minimize its effect on a system Before examining methods of limiting corruption, it is important to examine the principal-agent-client model of corruption. The principal-agent-client model of corruption is similar to the interaction between the government, politicians, and interest groups.

The principle (the government) employs the agent (politicians), who in turn interacts with the client (interest groups). Figure 1 represents the interaction between the three parties Usually, the agent put his own interest ahead of the principle s interest. Consequently, the principle always monitors the agent s actions. The principle exchanges information with the agent, who in turn exchanges information with the client. Furthermore, the client provides the principal with information, some of which concerns the agent. This relationship is referred to as an iron triangle (get a quote concerning the iron triangle theory and discuss it more) (explain the importance of this principle) Within the principle-agent-client model, corruption occurs when the client solicits a monetary bribe to the agent.

Figure 2 illustrates that the agent has the option of either accepting the bribe or rejecting it. His decision is influenced by weighing the payoffs associated with accepting the bribe against payoffs associated with rejecting the bribe. The game ends if the agent rejects the bribe. However, the agent usually accepts the bribe, because he gains nothing from rejecting it.

Figure 3 illustrates the sub-game which occurs between the agent and the principal. If the agent accepts the bribe, he is concerned with being caught by the principle. Ideally, the agent wants the corrupt act to go undetected by the principle. If the principle learns of the bribe, the agent s concerns shift from being caught to the severity of the principle s punishment. If the punishment is relative small, the agent will not be concerned with the punishment in the future.

The ideal amount of corruption in a system occurs when the cost of corruption is equal to the cost of removing the corruption. Figure 4 illustrates that the optimal amount of corruption occurs at q , where the amount of money spent to eliminate corruption is equal to the amount of money the client offers the agent to be corrupt. The agent will choose not be corrupt at q or any point in the shaded area below the intersection. However, the agent will choose to be corrupt at any point in the shaded area above the intersection.

(why is this the case) After examining corruption, we shift our attention back to controlling and minimizing its effect. Corruption (C) is defined as monopoly (M) plus discretion (D), minus accountability (A). In mathematical terms, C = M + D A. To decrease corruption, the principal must do at least one out of three things: (1) decrease the possibility that a single agent can exercise a monopoly over the client, (2) increase the agent s accountability, or (3) decrease the agent s level of discretion The principal should restructure the principal-agent-client relationship, in order to decrease the agent s ability to gain a monopoly over the client.

"The principal may induce competition among government agents. A client may be able to avoid extortion if there are many government agents to whom he or she can turn to for service. In simple models honest agents eventually drive out dishonest ones." Similarly, the principal can constantly change the agent s clientele list. This prevents both the agent and the client from becoming comfortable with each other and thwarts any bribery attempts.

(give a real life example) The second approach increases the agent s accountability to the principal for being caught engaged in corrupt acts. The most obvious method of achieving this goal is to making the punishment for being corrupt harsher. " Infinitely large penalties are an optimal solution for certain principal-agent problems" and force the agent to reexamine the pros and cons of being corrupt. Similarly, the principal should concentrate more on curtailing corruption at the lower level politics. Regional agents are more removed from the principal than national agents. Consequently, they are more susceptible to corruption.

Curtailing corruption at the local level places greater pressure on higher level agents to discontinue corrupt practices, because there the higher level agents have more to loose if the principal turns it effort toward reforming their practices. The third approach involves decreasing the level of discretion associated with corrupt act. The principal can achieve this goal by providing incentives for agents to reports corrupt acts committed by other agents. Similarly, the principal can bring in an independent auditing firm to monitor the interaction between agents and clients. An example of this approach is the office of the special prosecutor to investigate allegations against high level agents.