Theories of corruption

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crime and compares them with the gains and losses from staying out of crime. The individual is rational and chooses to commit a crime if the net expected gains from crime are greater than the net gains from not committing crime. Becker’s rational theory has been expanded and incorporated in several theoretical approaches, including agency theory. Agency theory declares that modern societies are characterized by the existence of very structured hierarchies in which individual relationships are structured around delegation. In such a situation, the principal-agent problem occurs when one person or entity (the "agent") takes decisions and/or actions on behalf of, or that impact, another person or entity (the "principal”), in the absence of complete information about the agent itself (Laffont and Tirole 1993). Laffont and Martimort (2002) observe that the agent is selected based on his/her specialized knowledge and the principal can never hope to completely check the agent’s performance. Accordingly, delegation is particularly problematic because information about the agent is imperfect, which can bring the agent to:

i) conduct an act based on private information ignored by the principal (adverse selection);

ii) conduct an act unobserved by the principal (moral hazard).

Informational asymmetries create an imbalance of power in transactions that can incentive adverse selection or moral hazard. In public contracting, adverse selection categorizes principal-agent models in which an agent already owns private information before a contract is written, which limits the selection of the most efficient contractor. In this case, the principal is not aware of former informal deals signed by the agent. Moral hazard is typically defined as “post‐contractual opportunism”. In this case, the agent – which has different interests from the principal’s – acts opportunistically based on information unknown to the principal. For example, the contractor does not carry out the work in a way that was expected according to the contract. It usually occurs when a supplier provides misleading information (e.g., in relation to production costs) and changes its behavior after the deal is signed (Cox et al. 1996). Both moral hazard and adverse selection exist in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals because of (1) unaligned goals or (2) different aversion levels to risk (Laffont and Martimort 2002). In this scenario, the principal-agent relationship gives rise to opportunistic behaviors if:

i) the agent has an informative advantage;

ii) the principal’s and the agent’s objectives do not coincide;

iii) the agent has low morality.

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It follows that preventive strategies should attempt to reduce the opportunistic behavior of the agent by increasing the level of risk perceived by the agent itself. In this sense, different preventive efforts must be combined to reduce dysfunction and promote integrity and accountability. On the one hand, prevention strategies should be designed to increase the probability of detection and sanction. In this sense, enhancing the collaboration between watchdog agencies and professionals can reduce information gaps and make anti-corruption actions more effective (Khoman 2017). On the other hand, prevention strategies should provide the principal with more knowledge to select the agents who are best endowed in morality and skills necessary to run procurement activities efficiently (Ancarani et al. 2016). In order to select the most efficient contractor, the Italian procurement system has introduced a qualification system which stresses the technical, financial and management requirements necessary for the purposes of granting public work contracts.

This qualification system has beneficial effects on the functioning of the procurement system (Estache and Iimi 2012). Ancarani et al. (2016) have found evidence that fully qualified firms are more efficient in the execution of public work contracts than not-fully qualified firms. Nonetheless, several scholars have recognized that qualification does not provide disincentives for firms to act opportunistically. Spagnolo (2012) suggests the use of reputation as a mechanism to reduce the moral hazard of opportunistic firms.

Reputational factors may rule out distortion in contract awarding, allowing to select the most efficient contractor and provide the supplier with the correct incentives (Doni 2006;

Ancarani et al. 2016). Reputation is relevant in the assignment of a contract to the most skilled firm, and it can have positive effects on public procurement outcomes (Calzolari and Spagnolo 2016; Fiorino et al. 2018).

3.1.2. Crime pattern theory

Sutherland was the first to introduce the term “white-collar crime”, defined as “a crime committed by a person of respectability and high social status in the course of his occupation” (Sutherland 1952, 183). Scholars have built upon Sutherland’s definition to investigate and understand both white-collar crimes and white-collar criminals. Currently, despite the relevant impact of this approach, many researchers have argued in favor of abandoning it and switching to a perspective that relies more on the mechanisms or the modus operandi in the offenses (Felson and Clarke 1998). Specifically, one strand of literature by Benson et al. (2009) observes that all forms of white-collar crime occur within an opportunity structure. This means that a set of conditions must be in place for the offence to be committed.

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Within the opportunity theory framework, three major theories have laid the foundations for the study of criminal opportunities: routine activity theory (Felson and Cohen 1980), situational crime prevention theory (Clarke 1980) and crime pattern theory (Brantingham and Brantingham 1993). These theories address how crime opportunities are formed by immediate environments, and then discovered and evaluated by potential offenders. It should be noted that all opportunity theories embrace different perspectives, and are all influenced by previous theories (i.e., social learning, rational choice and interactionism).

According to Cloward and Ohlin (1960), for example, criminal opportunity impacts criminal behavior due to its influence on the development and maintenance of a delinquent subculture in a “social learning process”. The above-mentioned theories all have a common background and patterns. One is related to the environment – also called “network” – where the criminal activities are committed. These networks provide offenders with a “place” to access their victims or the resources of their victims (Clarke and Eck 2003).

Crime pattern theory is conceptually better suited to pursuing the objectives of this dissertation. According to this theory, offenders become aware of criminal opportunities as they engage in their normal, legitimate activities (Brantingham and Brantingham 1993). The opportunity structure for any particular white-collar crime is dependent on the

“nodes” and “paths” used by the offender. The nodes of a white-collar criminal include the business or organization they work within, and any other outside agency, organization or peers with whom the white-collar criminal is associated. The paths refer to the mechanisms used or exploited to break the law for personal gain (Brantingham and Brantingham 1993; Felson and Clarke 1998; Benson et al. 2009).

In public procurement, the nodes concern either the private firm winning the public contract or the contracting authority awarding the tender. On the one hand, the private firm can exploit its personal or political ties with the contracting authority in order to extract rents from the public contract (Goldman et al. 2013). On the other hand, the private company can be part of a collusive agreement in which connected firms bid together to ensure the contract to a pre-selected bidder within the collusive network (Conley and Decarolis 2016). In the first case, the nodes include the two main actors:

the supplier and the contracting authority. In the second case, the nodes refer to the private sector in its entirety.

The paths do not just refer to the type of corrupt act involved (e.g., bribery, trading in influence or conflict of interest), but also to those legal artifices that a company may use to hide fraudulent and/or opaque schemes. For example, a company can hide its structure behind a corporate veil (OECD 2001) or by implementing other strategies that

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make it more difficult for law enforcement and judicial authorities to monitor and prevent illegal activities. Therefore, it is important to recognize that the opportunity structures of a firm are often connected with a legitimate business activity. Public officers and/or bureaucrats can also act strategically to gain benefits for themselves. For example, a politician can decide to award a contract to a specific bidder in exchange for the promise of future employment (Fazekas et al. 2015).

From this perspective, opportunities may be characterized as attractive or unattractive from the standpoint of a certain agent (or group of agents). The degree of attractiveness of opportunity is determined by at least four factors (Benson et al. 2009):

i) the actors’ perception of the potential gain. An actor decides to be involved in corrupt schemes if he/she perceives the benefits of his/her choice to be higher than the costs;

ii) the perception of potential risks, such as the likelihood that a criminal act will be detected and the severity of the sanctions that would be invoked if detected;

iii) the compatibility of the opportunity with the ideas, rationalizations and beliefs of the actors;

iv) the evaluation of an illicit opportunity in comparison with other licit opportunities the actor is aware of, which influence the actors’ entire opportunity structure (Hollinger and Clark 1983; Benson et al. 2009).

Thus, a decrease in the attractiveness or availability of legitimate opportunities will increase the attractiveness of illegal opportunities (Coleman 1987).

As a result, corruption in public procurement can be regarded as the intersection of at least two processes. The first is a legitimate process that is followed or employed in the public or business world, and the second is an illegitimate process that is “parasitic” to the first. Prevention involves adjusting the legitimate process to stifle individuals’ ability to act illegally in relation to it (Benson et al. 2009).

3.1.3. From theories to prevention

The two theories described above circumscribe the phenomenon of corruption in public procurement to the rational action of the agent, identified in the supplier to which a public contract is awarded. The agent acts in a known environment/system. In this environment, the agent evaluates possible illegal opportunities to commit a crime based on personal information, which are unknown or unobserved by the principal. This information influences (1) the agent's degree of morality and (2) its attraction to criminal behaviors.

If the perception and evaluation of the benefits is greater than the perception and

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evaluation of the costs, the agent will be inclined to take advantage of the illegal opportunities to obtain a personal advantage.

Illegal opportunities can arise throughout the entire process, from the pre-award stage to the contract implementation phase. The agent exploits the criminal opportunity according to the information it owns, to obtain the maximum rent from the awarded contract. In order to extract the rents – or distribute the rents among the corrupt network – the actual costs declared for the realization of the public contract must be greater than the real costs borne by the private firm (Fazekas et al. 2016). This implies that the agent rationally has the intent to delay the delivery of the public contract or increase the economic demand, e.g., through the submission of false invoices or through misreporting techniques (Passas 2007), or through manipulation of the system by falsely inflating needs (Transparency International 2013b).

A sound preventive strategy requires the identification of the features of the settings that allow the crime to occur. In fact, control and prevention depend on how the crime is performed by the agent within the range of structural opportunities. To address corruption in public procurement, the first preventive action is to analyze all ‘environmental opportunities’. Environmental opportunities can provide the agent with asymmetric information, i.e., confidential information regarding tenders can place some bidders at a greater advantage during the pre-awarding stage. A deeper understanding of the corruption opportunities emerging along the procurement chain helps the monitoring activities of institutional agencies and watchdogs, and the identification of positive incentives that can reduce asymmetric information among agents involved in the procurement process. The next section explores the corruption opportunities emerging along the procurement chain.