Economic Annals 2002 Volume 43, Issue 155, Pages: 7-33
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Milovanović Milić R.
The paper deals with a new form of corruption developed with the privatization process in transition economies. Prerequisites for this form of corruption are dispersed ownership claims, underdeveloped capital markets, feeble product competition, and managerial class willing to behave opportunistically. In all transition economies labor has a strong incentive to unionize in order to avoid restructuring and consequent loss of jobs. Managers, on their part, realize that under the stated conditions unionized labor may protect their position in the eventual confrontation with outside owners, so they promote friendly union leaders. Both sides find cooperative strategy strongly dominating the other possible ways of conduct. Consequently, managers give special privileges to union leaders, who turn their blind eye to managers' misconduct. Mutual benefits are financed at the expense of outside owners who are clear losers in this game. Starting with the public choice definition of corruption - as selling of ownership rights by an agent to a third party - this process is labeled as endogenous corruption. The endogenous corruption is clearly harmful since the combined gain by the parties involved is less than the loss in consumers' and producers' surpluses. The endogenous corruption deal remains unopposed due to the Olson's paradox, i.e. gains are concentrated and losses are broadly dissipated and consequently no countervailing action is taken. As usual anti-corruption strategies do not help, final section of the paper discuses potential remedies. .