Aligning Incentives

In some corruption cases, support for the enforcement of rules can be created with policies that change the rewards associated with corrupt choices. If policy changes ensure that productive behaviour achieves satisfactory returns for important actors, this can create support for the enforcement of rules.

Bangladesh

For example, in ACE’s project on power sector investments in Bangladesh, we examine how the drying up of low-cost, long-term finance for power plants contributed to productive firms adopting higher-cost strategies with close ties to politics. These firms adopted these strategies for their payments to be credible, but the entry of politically-connected firms also raised generation costs.

Attempts to enforce transparent contracting haven’t worked thus far because the players in this market aren’t interested in transparent bidding with that pricing structure. Appropriate changes in the structure of incentives could therefore induce serious investors back into the market. This would also generate ‘horizontal’ support from enough potential investors for the enforcement of desirable procurement and contracting rules.

Nigeria

The challenges in the Nigerian power sector are very different. The dominance of politically-connected companies in both generation and distribution makes it difficult to create incentives for serious investors to enter the sector. In this context, creating credible incentives in smaller power plants that are embedded in industrial clusters or solar generation may be more likely to elicit support for appropriate rule enforcement.

Tanzania

The poor performance of skills training financed by the skills levy in Tanzania is another example of rule violations driven by adverse incentives. Firms paying the levy find that inadequate sums are spent on training and they have to illegally employ foreign workers to meet skills shortages.

Restructuring the way in which training is funded so that high capability firms can spend more on training and get rebates on their levy if they meet certification requirements may increase support for anti-corruption enforcement in this sector.

In all these cases our research task is to provide evidence for the design of feasible anti-corruption strategies to lead to improved development outcomes.

Image credit: IFPRI/Milo Mitchell (Creative Commons)