The Carrot and the Stick

Using Game Theory to Minimize Corruption in Guatemala

Abstract

After I helped construct a school in Guatemala, I found their educational system might be corrupt. I used game theory, or the study of strategic interdependence, to analyze this issue. Each actor anticipates the other’s reactions and acts accordingly. Payoff matrices, 2-by-2 grids in which one actor’s options are listed across the top of the boxes and the second actor’s options are listed by the left side of the boxes, helped simplify this complex situation into a workable model that shows individual incentives and actions as well as the collective best action for societal welfare. If the first player makes “x” choice rather than “y” choice, is the second player incentivized to make “a” or “b” choice? Conversely, if the first player makes “y” choice, is the second player incentivized to make “a” or “b” choice? If, for a particular choice, no player can do better by unilaterally changing its decision, it is a Nash equilibrium.

                Ideally, the government won’t receive a bribe, and the parents will send their children to volunteer. The penalty if the local government gets caught accepting a bribe plays an important role; interestingly, increasing the government's goodwill amongst the local population through the school-building process would also lead to the ideal outcome. Further, simultaneously increasing both the penalty from accepting a bribe, as well as the goodwill to the government from school-building, produces the optimal outcome. I call this the “carrot and the stick” approach, and it may prove quite effective in ending corruption entirely.