Dollars and Jens
Wednesday, May 12, 2004
corruption and doing business
A friend working for the government of Cambodia related an argument he's heard there against cleaning up corruption: the opportunity for graft is part of the salary offered to prospective employees, and so attracts better employees than the government can afford to hire honestly. Surely it would be better to assess the bribes as taxes, and pay them out as higher salaries, but the tax hike would hurt the economy in the conventional ways until the businessmen paying them came to trust that they wouldn't still have to pay the bribes in addition — thus there are transition costs until the regime builds up credibility that it is cracking down on corruption. And there's no telling, politically, whether the regime has the patience to wait out that period of time, which, of course, is exactly the concern of the businessmen during that period of time.1 Catch-22.
Anyway, what brings this to mind is Tyler Cowen's argument that underpriced IPOs are a way of a bank charging for its underwriting services. (N.B. This isn't the only argument he makes.) This feels to me like a very similar argument, and it doesn't feel right to me that hiding this part of the fee under the table would be the best way of getting things done. The idea that the first-day runup creates more interest in the stock, and thereby may enable the company to prosper later from a secondary offering, is one I have heard before; it, too, appeals to market inefficiency, and it, too, may not be entirely incorrect. Also, it, too, doesn't appeal to me; it just feels that by the time that becomes relevant the effect should have worn off to an extent greater than would compensate for the costs. This still leaves us with the question
On top of that, there is a puzzle. Unless you think all of the initial share underpricing is an legitimate fee for services rendered, why have markets tolerated this practice for so long?This has me wondering why corruption developed in Cambodia. Somewhere along the way, it must serve someone's interest to obscure the true cost of doing business, even if everyone has a sense of what it is.
1 It also may be that the costs of the transition would exceed the benefits ultimately accrued from it, though this conclusion doesn't appeal to me, or probably anyone else reading this.