Saturday, October 22, 2005

Game theory,economics and corruption

Game Theory ,economics and corruption
Despite some critics, there is widespread acceptance of the key role Game theory has had to understand human and business behaviour.. The basic question is ¿ Whether our competitors are rational, and try to maximize theirs benefit, how come that such behaviour may influence our own decisions about to chose the optimal strategy for prices, production or innovation?. Take a look to what it is going on with air lines `s reaction to the increases in oil prices, How much they do care to make the first move to increase ticket prices.-
The same reasoning may be applied to corruption. The figure below, shows the case for two people “a” and “b”, They do not know each other , before doing a commercial transaction which in general, give high value to credibility, and honesty. “0” means loses , and “1” means a gains. In such a case, they would chose quadrant IV, (1a,1b, the lower right corner) and the no corruption solution (NC) would prevail. However, at society level with no clear incentives to favour the same values, which means a weak judiciary and legal system to make sure everyone is equal to confronts the law, or elusive procedure related to check out decisions at a management level, the result would be the quadrant I, (0a,0b,)the one of the upper left corner! in which the society loses. Nobody cares to protect his integrity, whether they feel alone and therefore with no reward in keeping that value. In such a case ,it does not matter to follow a corrupt pattern of behaviour. Society as a whole make a lose because of corruption. The recent report coming out from Transparency International,(GCR 2005, ) shows countries with different levels of corruption ranking from high to low levels. Those countries with higher level of corruptions, are the ones usually considered to have lower economic growth expectationsl . Corruption increases transaction cost for business decisions.
On the other hand, those countries with low level of corruptions have a more stable democracy and prosperity.
The figure shows options for a society
between corruption(C) and no corruption (NC)
Cb NCb

Ca 0a,0b 0a,1b

NCa 1a,0b 1a,1b

Therefore, the challenge is to keep society and business away from the suboptimal quadrant I (0a,0b).This means to improve the quality of legal systems to impose sanctions, the accountability of decisions related to the allocations of resources whose utilizations is a matter of public good faith, and transparency when it comes to check out administrative procedures -

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