Lokpal or some mechanism design theory? Your choice.

Top politicians and so called members of “the civil society” are all enthusiastic to get the best Lokpal bill in the world. What bewilders me is the fact most of this is show off and meant to gain media mileage. I do not think that these sudden saints of India care about corruption or welfare at all. If they did, then there are probably easier mechanisms that you’ll find in any elementary economic theory text book which are easier to implement, easier to manage and more welfare improving than designing laws and getting passed. My worry is that if the society is inherently corrupt and works largely in self-interest then no law would serve the required purpose. What would work however is a mechanism which is incentive compatible and individual rational for all participants of the society. Better still, some of the leading experts in game theory and mechanism design are Indians. To a student of economics names like Dilip Abreu, Arunava Sen and Rajiv Vohra are well familiar.

Some years ago I remember two IIT-IIM graduates, working for ONGC and some government construction company in U.P. and Bihar respectively, getting killed because they had gone a little too deep into the business of the local mafia. Obviously, even the local police did not do anything because unarguably even they were involved. As far as I remember, nothing eventually happened. Even the national media have forgot about them and are spending their airtime covering the jackass, good-for-nothing Ramdev. No member of the civil society ever pursued what happened to these young kids and what they were after. And I can assure you that there would be plenty cases like these which do not even get reported and no one really cares. In such an environment then, it inherently becomes the best response of every one to play the strategy to maximize their own welfare and forget about the society. It’s like the classic co-ordination failures game!

Do we have a better solution? I believe we do. Let me give an example. Kaushik Basu says that typically we have too much of government and ideally government should be scarce. I buy his point entirely. Why do you want to do everything yourself? Delegate. The government should just create incentives so that funds get allocated in the right areas and work happens. Consider a system in which the local government or panchayat lists out the facilities that are required in its area – roads, schools, electricity, sanitation, houses anything. Let them also run a fund where anyone can contribute and would be eligible for a r% tax rebate. Let r vary according to availability of funds in schemes. So like in a stock market, some scheme that has received more funds offers a lower rebate than a scheme that has received less funds. Market would ensure that all the funds get equally allocated. Then the panchayats can develop local areas on their own. This reduces the burden on the tax authorities, budget allocators, government, and bureaucracy and gives incentive for everyone to contribute. Since the payment will be online or electronic it will be easier to monitor. Alternatively, corporate giants can take care of small villages entirely and develop them with their money. My hunch is that even if you given them an over 100% rebate it’ll be better for the government in terms of the bureaucratic inefficiencies they have to deal with. Better for the companies also. Obviously, all corruption won’t be over but it’ll be reduced and hence better.

You can also have some government servants to look over the work that the corporate sector does. Again one might expect collusive corruption but if the local authorities have an equal say in ensuring that the rebate actually happens then this would again reduce. What I just said is not foolproof but you get the point. I’m sure if people like Sen, Vohra or Basu sit and create schemes they’ll come with actual better ones. What I am saying is that you do not always need stringent laws. It’s a waste of time. If people now have means and ways to escape the present laws, they’ll surely find ways to escape the new ones later. However, what you need is to get around the “middle men” and put in place a mechanism that is incentive compatible and rational for everyone. With some leading mechanism designers from India, I do not understand why they are not engaged in policy making. For example, why weren’t Sen or Abreu contacted for designing the auction procedure for 2G or 3G spectrum.

Obviously, this is not incentive compatible for the government and the “civil society” because they are the ones who benefit the most when development of any kind happens through the government. Hence, everyone just moves towards creating newer laws and getting more media mileage.