Three recent cases included the arrests of the regent of Indramayu, West Java, on Oct. 15, of the Medan mayor in North Sumatra and of the head of the regional road authority (BPJW) in Samarinda, East Kalimantan. The first and third were arrested in relation to alleged bribery in public road procurement, while the second has been implicated in a series of illegal cash gifts from the local government office. Since 2004, 122 regional heads have been detained by the KPK and have been named suspects in corruption cases. They make up only a fraction of graft cases in Indonesia.

Economics can help explain the reasons behind this corruption, specifically game theory and behavioral economics. Game theory analyzes situations in which the strategic actions of one agent affect the payoff of another. Behavioral economics analyzes economic decisions using psychological insights about individual behavior.

One “game” studied in game theory is the prisoners’ dilemma. Imagine that two prisoners, each held in isolation, may either confess to a crime or remain silent. If both prisoners betray each other, they both serve two years in prison. If one prisoner betrays the other and the other remains silent, the betraying prisoner will be set free and the other will serve three years in prison (and vice versa). If both remain silent, they will serve only one year in prison. Thus mutual cooperation (confessing nothing) gives a higher payoff than mutual defection (betraying each other), but the best payoff for an individual prisoner comes from betraying while the other tries to cooperate. The lowest shared payoff results from trying to cooperate with the betraying prisoner.

Similarly, corrupt individuals act in their own self-interest. This does not result in an optimal payoff for society — that is, a world without corruption. Yet no one person can govern how others will behave. If someone chooses not to engage in corruption while others flout the rules freely, he or she loses.

Indonesia has been trying to stamp out graft since the 1971 law on corruption eradication. Several anticorruption teams and initiatives have been established. Yet chronic corruption — plus rampant collusion and nepotism — has continued. It contributed to the 1997/98 economic and political crisis which led to the fall of the New Order authoritarian regime. Now, 17 years after the enforcement of the KPK law, Indonesia’s democracy is still trapped in the prisoners dilemma of self-interest and corruption.

Threats of legal penalties for corruption, including imprisonment, have not yet created a sufficient deterrent. Under game theory, a threat tries to change another person’s behavior to align with the threat makers goals. For a threat to be credible, it should be carried out whenever the conditions of the threat are met. Such threats are fulfilled in Indonesia as evidenced by hundreds of corrupt actors sent to prison. Still, corruption continues.

When threats are credible, corruption is risky, with a high probability of being arrested and penalized. Humans are normally risk averse and prefer definite wins to indefinite outcomes. The temptation to engage in graft should be low in this case. Nonetheless, people may choose to engage in corruption even if penalties are high. Behavioral economics can shed light on this paradox.

Prospect theory, a branch of behavioral economics, hypothesizes that individuals tend to be risk averse in situations involving definite gains but become risk tolerant, or even risk seekers, when confronted with definite losses. Human beings are generally loss-averse and risk-averse at the same time because losses are much more distressing than gains.

To avoid loss, many choice-makers are eager to take risks, while to preserve gains, they will avoid taking risks. So when individuals face a dilemma, they might make unethical choices as a tradeoff to avoid a bad outcome or loss. In the case of corruption, such situations happen when there is an urgent to hold on to cash to have “something” along with an opportunity to get the cash quickly though illegal means.

Overconfidence might also encourage risky actions. People who engage in illegal activities tend to believe they can avoid monitoring, detection, detention and punishment. This might help to explain why certain people behave unethically even when the objective probability of being caught is high.

Prospect theory and research on overconfidence might raise the concern that corruption will never be mitigated or eradicated. No matter how high the risk, some people will indeed remain corrupt. Nonetheless, consistently enforcing credible threats remains the most effective way to stamp out corruption.

The struggle against corruption should be seen as “infinitely repeated games” between society and corrupt actors. Monitoring and detection, to make threats credible, can be achieved through spying, wiretapping and exposing the overarching patterns of corruption and flows of money. To win the sequence of games, society needs a powerful anticorruption agency, like the KPK.

Mitigating corruption also requires behavioral approaches that make use of psychological insights about how individuals make choices. Such techniques can help to reshape ethics — sourced from down-to-earth values such as religion, local wisdom and global standards — for good governance.

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