To Corrupt or Not To Corrupt: Game Theory Model of Corruption in the Philippines: Introduction Why Janet Napoles did it?

Game theory is a mathematical modeling of strategies. Every deal or transaction involves players or agents whose aim foremost are maximizing their gains or utilities out of a given game. Reference [1] presents a game theoretical model of corruption, mainly on the premise of economic gains. Reference [2] details the game theory model of why professional athletes indulge into doping in order to gain advantage or maximize their economic utility. Corruption in the Philippines is a cancer. For centuries, we know it exists but it seems theres no antidote for it. This paper aims to explain why people in the government or not continue to do corruption using game theory. Assumptions 1. 2. Small time corruption means small time connections and has heavier penalties like getting in jail therefore. Big time corruption means big time connections and has lighter penalties like getting treated in high level medical hospitals or house arrest in a luxurious mansion located in a high end village or eludes arrest since you can be tipped off and protected by your connections in government and law enforcements. Probability of getting exposed being involved in corruption is equal with perpetrators of small time corruption and big time corruption and very high ( 1.0) since Filipinos are really, really, really (like really) tired of this cancer of corruption plus social media savvy Filipinos let the news fly quickly. Game is simultaneous as players or agents choose among strategies (to do honest and clean transactions, to participate in a small time corruption, or to engage in a big time corruption deal).

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In economics, firms aim to maximize their utilities or financial benefits from any transaction they are involved with. Economic utilities for players or agents in the corruption game would be:

u i ( H ) = a, a > 0 u ( S ) = b, b >> a u( ) = i ui ( B ) = c, c >> b ui ( P ) = d , d > 0

(1)

where: H Player i deals honestly S Player i participates in a small time corruption activity B Player i participates in a big time corruption activity P Player is penalty due to getting caught in participating in a corruption activity a is the economic benefit of an honest government official or an ordinary citizen, this may be a regular salary or a normal profit from a project or a transaction b is the economic benefit of a government official or an ordinary citizen engaging in a small time corruption, for example LTO licensing c is the economic benefit of a government official or an ordinary citizen engaging in a big time corruption, for example pork barrel d is the economic loss of a government official or an ordinary citizen engaging in corruption but get exposed and caught for corruption

From this equation , c>>b>>a, meaning that the economic incentives to participate in big time corruption like pork barrel scam is much bigger than being involved in small time corruption like city hall departmental fund malversation. As always, the financial incentives to play clean and honest is very much lesser than being corrupt for the benefit may be your regular salary or spending the funds for the betterment of livelihood of Filipinos. The utility for being caught and penalized as a corrupt official or citizen is negative since this would mean economic loss upon player i. For the probabilities, applying the present scenario in the Philippines, pS is equal to pB, meaning there is an equal chance of being exposed as engaging in corrupt practices since Filipinos are very very very tired of corruption. Though in this analysis the economic loss dB will be lesser than economic loss dS which means when dealing with big time corruption, a person would have significant political connections thus less financial or economic loss compared to indulging into small time corruption. In this case, the big time political partner in a big time corruption will protect you since this will protect them whereas when involved in a small time corruption the economic loss is greater since no big time personality is involved to support you or to save their face thus you get caught and may go to jail. Consider players or agents (player 1 and player 2) choose to indulge in big time corruption, the assumption is a player will get equal economic benefit and equal economic loss as his partner, therefore equal to 0.5 or half. In this case, the payoff of each player would be:

1 1 1 1 1 1 1 c + a p B d B = c p B d B = c d B = (c d B ) 2 2 2 2 2 2 2 1 1 remember c >>>> a, then c p B d B >>> a 2 2 also p B 1.0

(2)

From equation (2), the payoff of a player involved in a big time corruption activity would be equal to the half of utility c minus the financial loss dB due to getting caught since utility a would be diminutive and the probability of getting caught is high and equal to 1. If the probability of getting caught is small (<1.0), the players payoff increases as a result of decreasing product of pB dB , which is kind of intuitive of getting away with corruption. This analysis is also applied when both players choose to participate in a small time corruption dealing. If a player chooses a different strategy with the other player, the players payoff is assumed to be to amount of the utility of that strategy minus the economic loss utility if engaging in a small or big time corruption. Figure 1 provides the payoff matrix for the corruption game as a result of the discussion above, where the first term in close parentheses is the payoff of Player 1 while the second term in close parentheses is the payoff of Player 2.

Player 1 S

1 (c dB ), 1 (c dB ) 2 2

( b dS ), (c dB )

(a), (c dB )

Player 2

(c dB ), ( b dS )

1 (b d S ), 1 ( b d S ) 2 2

(a), ( b dS )

(c dB ), (a)

( b dS ), (a)

(a ), ( a )

Figure 1. Payoff matrix for the corruption game.

Nash Equilibrium Nash equilibrium is defined as an action profile with the property that no single player can obtain a higher payoff by deviating unilaterally from this profile [3]. Recalling that c>>b>>a and dB << dS , therefore (c-dB)>>(b-dS)>>a, the Nash equilibrium of the corruption game is the action profile or payoff where each player chooses B. In here, the dominant strategy of the game would be both players choosing to participate in big time corruption since no matter what the other players course of action is, a player would be better off choosing column B or row B. If a>>b>>c then corruption would never be committed for clean and honest government dealings is rewarded with enough economic benefits. However, that is not the reality. The reality is that payoff is too large when commiting corruption and for a very minimal penalty even when exposed or caught as a corrupt person. Another sensitivity is, if c>b>a but the penalties dB and dS are very high enough that would negate the utility gains, then the Nash equilibrium of this game would be [(a), (a)].

Conclusion This paper presents a game theory model of corruption practices in the Philippines. Currently, for people commiting corruption, financial or economic incentives are too high when their penalties are very low. If corruption is to be solved, if it is solvable, keeping corrupt officials in jail and heavy financial penalties must be given to persons who squander the nations resources thus exponentially increasing the utility of economic loss of corruption penalty. Also, aside for economic benefits, moral incentives must be considered by parties like rewards like honoring and recognition or promotion of honest public servants to increase utility for being honest in government transactions.

References [1] John Macrae, Underdevelopment and the Economics of Corruption: A Game Theory Approach, World Development, Vol.10, No.8, pp.677-687, 1982, available on-line: http://conferences.wcfia.harvard.edu/files/gov2126/files/macrae_1982.pdf [2] Kjetil K. Haugen, "The Performance-Enhancing Drug Game", Journal of Sports Economics February 2004 vol. 5, no. 1, pp. 67-86, available on-line: http://www.suu.edu/faculty/berri/JSE2004Haugen.pdf [3] Nash Equilibrium, available on-line: http://www.columbia.edu/~rs328/NashEquilibrium.pdf