Is police corruption necessarily economically negative?

On the personal money level, Serpico illustrated one, the luxuries of a life free of money constraints, and two, and how a corrupted culture affects the “deviant,” by-the-letter-of-the-law officer. Left unanswered by the movie, in my mind anyway, is whether widespread corruption is necessarily a bad thing. From a moral point of view, yes it’s wrong; these officers are paid to uphold the public trust. But how about from a non-moral, economic point of view? Why should we care if the officers take a few Franklins from the pimp or drug dealer, provided they are stopping crime? I’ll get to it in that in a couple paragraphs, after mentioning what the Knapp Commission officially reported.



The corruption was formally investigated by the Knapp Commission, created after the public uproar trigged by the series of New York Times articles on kickbacks and bribes. Frank Serpico was a key source on these articles. According to Wikipedia, the report identified two types of corrupt police officers, lamely dubbing them grass eaters and meat eaters. In short, the grass eaters were the passive followers. They accepted gratuities and solicited small payments from contractors, tow-truck operators, gamblers, etc, but did not actively pursue corruption payments. The meat eaters, on the other hand, were the leaders. They actively and aggressively pursued opportunities for financial gain, shaking down, for example, pimps and drug dealers for profits. The corruption, in other words, allowed the criminals continue doing business, and caused legitimate businesses competing fairly at a competitive disadvantage.

Centralized corruption is more economically efficient than decentralized corruption. In a centralized corruption regime, “rent seeking” corruption is monopolized by one central agent. In the case of Serpico, it was monopolized by police precincts. The bribe collectors can disregard themselves of a “tragedy of the commons” scenario; those paying the bribes can be confident that their payment is to the entire police precinct. With no other agents collecting kickbacks from the subjects (here, contractors, pimps, etc referenced above), individual agents (here, again, referring to the policemen) keep extraction from reaching an overly predatory level that would sink the business solvency or cause blowback. Of course, an agent’s greed can become insatiable, and an agent may be interested only short term profits. But centralized corruption regime knows better than a non-centralized regime where extraction limits are.

For the drug dealers and pimps, the rent seeking trimmed profit margins. Yet as workers of the underground economy, they avoid paying legitimate taxes. The kickbacks, therefore, become the price of these businesses for the same police protection that normal, legitimate businesses pay through legitimate taxes. Under an efficient centralized corruption regime, the rent seeking (that is, the kickbacks) can be seen as a predictable “tax” for remaining in business.

Because of city-wide decentralized nature of the regime, the pimping and drugdealing businesses had to remain focused in the micromarkets where the authorities where already paid off. If they expanded their businesses to another micromarket covered by another precinct, they might have had to pay off more agents, and more agents would have been forced to compete for extraction. Or, the drug dealers and pimps would have had to pay off those with more power and authority within the NYPD. But the higher the status in the NYPD, the higher their income, and the greater the potential cost of getting caught accepting bribes. Everybody, after all, has their price; but the higher cost to bribe higher-up NYPD could be prohibitively expensive. In a de-centralized corruption regime, the welfare and economic loss is greater.

True, in this case, the businesses were a blight on society, and we want them to suffer economic losses, and we, as a society, would prefer the police to suppress and end the trades. But the police lacked the power to do so. The state is supposed to enjoy a monopoly on power and violence. When this is not the case, as it was here, where the drug dealers and pimps acquired more and more unchecked power, individual police officers loyalties can be conflicted. The agents/ policemen become unsure of who possesses the stronger force for career and even survival. Corruption is a sign of a weak police force, or an overly powerful power hub outside of government (see this story) People respond to incentives, and when an external force provides financial benefits that rival or outweigh the career and financial benefits that the state offers, even with potential costs of prosecution, people will serve the external power hubs.

So admittedly, the answer to the question raised in the beginning of this post is not very counterintuitive or surprising. Corruption, centralized or decentralized, is bad. It is a form of rent seeking and creates a social loss. But in terms of efficiency, centralized corruption is preferable.