Issue 269: 2021 03 04: Bribery

04 March 2021

Bribery

The “Winner’s Curse”

By Neil Tidmarsh

If only they’d studied the work of Paul Milgrom and Robert B Wilson, the winners of last year’s Nobel Prize for Economics.  Or even Shaw Sheet’s own Frank O’Nomics (Noble Nobels, issue 252, 22 October 2020)…

The UN-sponsored Libyan peace talks were in disarray this week, only days after an apparent breakthrough.  The talks – hoping to unite a country which has been bloodily divided by an on-off civil war for the last decade – have been going on in Tunisia since last November.  Last week, the 75 delegates voted for an interim prime minister; they elected Abdul Hamed Dbeibah, a Libyan billionaire, to lead the country into elections for a national parliament later this year.  But this week, a UN Security Council report alleged that at least three of those votes had been purchased.

The bribery apparently came to light “in the lobby of the Four Seasons hotel in Tunis” when one of the delegates “erupted in anger… on hearing that some participants may have received up to… $500,000 for their Dbeibah vote, whereas he had received only $200,000”.

It seems likely that the vote will now be declared null and void, and that the peace talks will be back to square one.  In other words, whoever bought those votes has wasted an awful lot of money (and whoever sold those votes could be brought to account and won’t be able to keep the cash, either).  It’s a classic case of what economists call “winner’s curse”: a winning bid which turns out to be an uneconomical investment.  The economists Paul Milgrom and Robert B Wilson won last year’s Nobel Prize for their investigations into this phenomenon during their work on “auction theory”.  They concluded that uneconomical bids were the result of an imperfect understanding of market conditions, of inadequate information about the goods and who’s selling them and why.  They recommended a new format for such markets, in which all information about the sale – exactly what’s on offer, how much it’s worth, etc – should be made known to all participants.  This new format – the “common value auction” – has been proved to benefit not only the buyer but also (and perhaps paradoxically) the seller.  So, if only those corrupt Libyan delegates in Tunis and whoever was buying their votes had all been totally open and honest with each other…

There was a similar case in France this week.  Ex-president Nicolas Sarkozy was found guilty of bribing a judge, Gilbert Azibert, and both were given jail sentences – a year’s confinement which, pending an appeal, Sarkozy will probably serve at home with an ankle tag (and after a year of lock-downs we all know how gruelling that kind of sentence could be).  Prosecutors claimed that Sarkozy offered Azibert a coveted appointment in Monaco in exchange for information about allegations that Sarkozy had received illegal funding from the L’Oréal heiress Lilianne Bettencourt.

But here’s the thing: the case investigating those claims about illegal funding was eventually dropped – it never made it to court.  So, in the end, the bribery  was totally unnecessary.  Nevertheless, both of them ended up in court, the judge never got that post, and Sarkozy will probably be barred from public office, unable to run for leadership of the Republican party later this year as he was apparently hoping to do.  It seems that both of them misunderstood the market conditions of the deal, were inadequately informed about the value of the goods being bought and sold, and so both have been struck down by the “winner’s curse”.

And could there be a similar case brewing in Spain?  Ex-king Juan Carlos left the country last August, pursued by allegations of corruption.  Accusations put him at the centre of a multi-million euro tax haven scandal, but having paid almost five million euros to the Spanish tax authorities from exile in the UAE he is now hoping to be allowed to return to his homeland.  However, three inquiries into his finances are still underway.  One of them is investigating claims that he received illegal payments totalling €65 million relating to a €6.7 billion high-speed train contract in Saudi Arabia ten years ago.  €65 million might sound like a tidy sum but, if the claims are found to be true, it will be seen to have cost a throne and a kingdom, literally; an uneconomical investment, surely, a clear case of “winner’s curse”.

It’s reassuring that neither king nor president nor judge nor UN delegate is above the law these days, but one wonders whether a better understanding of Milgrom and Wilson and the economics of “auction theory” would have changed their outcome.  Perhaps bribery, being necessarily covert, can never be open enough to qualify for a “common value auction”?  Well, let’s experiment.  This highly influential and opinion-forming column is followed by as many as five readers each week (but as they include my dog, my probation officer and my therapist, that really leaves only two readers – how about that for the honest and open sharing of information as recommended by Milgrom and Wilson?); so, for one month only, this column could spread your influence and opinions to both those readers (well, to one of them, because I guess you are the other one) for the very reasonable sum of – (‘Stop!  Right there!  That’s quite enough of that!  I’ve warned you about this before, Tidmarsh!  You’re spiked!’ – Editor).

 

 

(Cover page photo of Nicolas Sarkozy – World Economic Forum, Creative Commons)

 

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