Paul Mirengoff (coming from Dick Meyer) had an interesting idea a while back about Congressional corruption. Basically, pay Congressmen enough money to let them feel rich and you will cut down on corruption.
In the world of economics, this is called the efficiency wage, coined by Joseph Stiglitz (as I recall). There is an economic phenomenon called the principal-agent problem. Basically, the principal hires an agent to work for the principal’s benefit. This can be an owner hiring an employee, an owner hiring a manager, a manager hiring an employee, Tony hiring kids to mow his lawn, etc. In the literature, there is usually one action which the principal would like the agent to take, but this action is costly to the agent. Tony wants the kids to mow his lawn properly, to the right height, and in smooth lines. The kids, meanwhile, just want paid and would like to do the least amount of work necessary to get the job done. Thus, they will cut corners, shirk, and avoid additional work. In a lawn-mowing example, this might not be as easy to see as, say, an officeplace where employees spend half their day surfing the internet.
That is the primary dilemma in the literature, and there are a few solutions, but these are generally “second-best” solutions. For example, Tony could personally oversee the lawnmowing work and make sure that the kids aren’t goofing off and are doing everything correctly. He could also hire somebody to do that work (but then we have another PA problem cropping up…). He could spend money installing cameras or use other technologies to monitor the employees. This, however, is a costly activity. If he has to sit there and watch the kids, he has less time to sit around in his underwear and play video games.
Stiglitz came up with an interesting idea to get around this problem: the efficiency wage. He would tell Tony to tell the kids, hey, if you want to slack off and do a bad job, I’ll pay you what you consider a crappy wage (but is actually equal to the market wage). On the other hand, if you work hard and dedicate yourselves to your jobs, I’ll pay you above-market wages. But if I catch you slacking off after giving you the higher wages, I’m busting your chops back down to the low wage or firing you. In either event, if you take for granted what I’m offering, you won’t get it back.
So to put numbers on it, we can say that the kids would receive $5 an hour for mowing his lawn and they take one hour to mow the lawn. When Tony gets his lawn mowed, he realizes $6 of intrinsic value if the kids do a poor job but $9 if they do a good job. The monetary value of the additional effort which these kids exert is worth $2. Stiglitz is saying that Tony would receive $3 in value if the kids work hard and do a good job, and because the cost of effort is less than $3, Tony can pay them $2 and some change and he still gets between 1 and 99 cents of additional value from this transaction (depending on exactly where they negotiate this higher wage). But if the kids slouch, they’re back down to $5 an hour, permanently. The important thing, though, is that you have to have some kind of way of quantifying or recognizing when the kids are working hard. To make educational examples easier, professors generally assume that harder work leads to a higher percentage of success or a greater quantity/quality of output, and although this is not entirely true, it works well enough in most cases that you can use it as a first approximation.
On its surface, it seems like a smart idea. Mix it in with some monitoring (likely random to reduce the cost) and you have a potential solution. It’s beautiful, simple, and unfortunately, there is a big problem with it: once you bring in other firms, it no longer makes that much sense. Let’s go back to the lawn-mowing example. Tony offers the efficiency wage contract because he benefits from it. We can assume that anybody who is willing to pay the market price for those kids ($5 an hour) must value the kids mowing their lawn at $5 an hour. Some of these people—like Dan—might not care that much whether the kids mow their lawns well or not, but some people will. So you will have other people willing to offer either the same or a similar contract structure to Tony’s offer. But now that the kids have multiple opportunities for high-value contracts, they have no incentive to work hard for Tony. If Tony pays a kid $7.50 and the kid shirks, even if Tony does end up firing the kid, all he has to do is go to another place and mow that person’s lawn, getting the $7.50 (or something like it) there as well. And because we are not talking about differences in quality between groups of individuals, but instead about the behavioral choices of a person who can choose either to work hard or to slack off, the next employer will have a tough time finding out that he shirked at his previous job, especially if it was in the same industry and the two firms are competitors.
This is my major problem with the idea of efficiency wages: if it makes sense for one firm, it should make sense for all firms. But as soon as it makes sense for all firms, the efficiency wage ought to be the market wage because there is no reason to pay less. If I can get better performance and a better bottom line by paying certain employees more, why am I not doing it already? And even if I don’t want to, once my competitors start doing it, I have to follow along or I won’t get the same benefits and will fall behind.
For Congress, however, we have a slightly different scenario. Congressmen still have opportunity costs, but there aren’t any competing Congresses around anymore for them to go to. Thus, you have a stronger case for efficiency wages potentially applying. I am not convinced by this argument, however, because I think that it doesn’t really hit at the reason for the problem. There might be some Congressmen who want to live the high life but are constrained by their salaries (though this does not include benefits, such as congressional staffs, travel stipends, etc.). However, the thing which many Congressmen want is to get re-elected so that they can maintain their perks and keep living that life. $1 million won’t swing many Congressional districts, so they still need to raise money, and once you go down this road, corruption is almost inevitable, be it the William Jefferson or Duke Cunningham style of taking cash directly or the Jim Murtha style of taking campaign contributions in return for political favors later. This, incidentally, is my second-biggest problem with McCain-Feingold campaign finance reform: they see the problem but strike in the wrong direction. Instead of trying to limit the corruption money (which will flow no matter what rules you put in place; people are clever enough to understand how to skirt the rules, especially when some of those people are the ones who made the rules in the first place), limit the value of corrupting a Congressman. Right now, giving the right Congressman a $50,000 contribution can net you millions of dollars in kickbacks. Take away or drastically limit the power of Congressmen to offer such kickbacks by reining in Congressional scope of authority and tightening the available budget and you end up with a less valuable Congress and less desire from companies to buy Congressmen. That, rather than efficiency wages, is probably the best bet to limiting Congressional corruption, at least to the extent which you can limit it.
