How business community institutions can help fight corruption

Collective action by the business community to counter corruption in the award of government licenses and contracts is analyzed, by analogy with contract enforcement institutions studied by economic historians and contract law scholars. The suggested anti-corruption institution comprises a no-bribery norm, a system to detect violations, and a multilateral ostracism penalty upon conviction in a tribunal. In combination with formal state law, a business institution of sufficient quality-probability of detection and severity of punishment-can eliminate corruption; a less good institution helps reduce it. The legal and communal institutions together achieve substantially better outcomes than either by itself.