Given that corruption exists, here’s a toast to the most important cog of the Corruption Industry.
A species that is near-ubiquitous around government offices, especially those that have a notorious reputation for being corrupt, is the tout. These ‘consultants’ help customers and members of the public navigate the labyrinthine bureaucracy inherent to such establishments and get their work done – in exchange for a fee, of course.
At first glance, touts don’t seem to add value, since they are middlemen getting a further cut of what is already an illegal process (corruption and bribery). On closer examination, however, there is a specific role that touts perform, and it has to do with simply cutting uncertainty, and easing the transaction between the ‘buyer’ and the ‘seller’.
Paying a bribe is no easy task. The monetary burden apart, the process of offering a bribe itself is rather unpleasant. For starters, it is a crime to both offer and receive a bribe, so by initiating an activity of bribery, the person offering the bribe is suggesting that the parties indulge in an illegal contract. This process is fraught with risk, since the counterparty might turn out to be either an honest officer or a law enforcement officer in disguise.
Secondly, the timing of the bribe is crucial. Offered too early, it might indicate the sort of eagerness among the payer that the receiver might be able to exploit in order to extract greater rents. Offered too late, the bribe may not serve its purpose at all.
Then, to determine the quantum and nature of a bribe is no trivial task. While some officers might be brazen enough to make their price explicit, others try to practice ‘revenue management’ (or ‘first degree price discrimination’ as economists like to put it) and let the ‘customer’ make the first bid, and making this bid is no easy decision. On the one hand, nobody wants to pay more than what is strictly necessary in order to get their work done. On the other, offering an amount too low runs the risk of putting off the officer to the extent that it is impossible to secure his cooperation at any price.
These factors together make the practice of bribe-giving (and bribe-taking as well – since the officer in question wants to maximise rents) rather inefficient, with the total cost involved (including the cost of risk) being far in excess of the actual quantum of the bribe that exchanges hands. In fact, from the perspective of reducing corruption and bribery, this inefficiency is a good thing, with the hope that the inefficiency and high costs involved in bribery will result in lower levels of corruption. The ‘corruption industry’ has, however, found a rather simple solution to the problem – the introduction of a middleman.
The basic service that the tout offers is in cutting uncertainty – when dealing with a tout, all parties concerned know they are indulging in an illegal transaction (for their own benefit). This removes the uncertainty on whether the other party will object to the illegal transaction, and also allows for a formal negotiation on price and services.
This way, touts can strike long-term deals with officers, where touts get assurance of fixed prices for services for their clients, in exchange for bringing in a steady flow of business.
At the other end, touts can name a precise price to customers (in most cases it’s the fixed rate they’ve agreed to with the officers plus their own markup), and also offer the customer assurance that their job will be done as promised. (It is the fact that both parties know the transaction is illegal that allows for such assurances – after all, nothing gets put down in writing.)
The advantage for a customer of using a tout is that it not only gets rid of the unpleasantness of having to offer a bribe and potentially bargain over it, but also offers certainty that the task will get done. Moreover, in the average case, the total fees paid to the tout is far lower than what the customer will have to bear in terms of getting the work done directly – especially if the cost of time and effort are taken into account.
From the perspective of an officer, touts offer reliability and some sort of a steady cash flow. They filter out ‘unpleasant’ customers (potential law-enforcement officers and and conscientious customers who are wholly unwilling to pay a bribe) and help avoid the potentially lengthy bargaining process with the customer. There is also the certainty of dealing with a small number of parties, which fosters trust. All these advantages more than compensate for the potential loss in revenues (since the tout’s fixed prices mean that there is no scope for revenue management).
Finally, how do touts set their prices? How do they know what to charge for a particular ‘service’? This again follows the laws of basic economics, and the price a tout can charge based on the demand and supply of the services offered. Supply is usually constrained by the officer’s practice and reputation, and by the number of touts he is willing to entertain.
In other words, a tout adds value by reducing uncertainty and making explicit what his counterparties can’t usually make explicit. The traditional transaction between the buyer (the ‘customer’) and the seller (the ‘officer’) is unpleasant and fraught with risk. By inserting himself in the middle, the tout brings down other transaction costs, and monetises them for his own benefit!
Further reading: Karthik’s book, Between the Buyer and the Seller, is out now on Amazon.