Harvard Business School’s Rafael Di Tella, who studies political corruption, offered commentary on a Harvard Business Review case study called The Shakedown. At stake in the scenario: should a business pay bribes to compete in an emerging market?

A few nuggets from the HBS Working Knowledge piece Should I Pay the Bribe? . . .

I’ve been surprised by how little progress we have made with the standard economic model of incentives (to fight corruption). For example, I don’t think we could have predicted the little use we have for strategies that would pay high salaries in bureaucracies to deter corruption.

The biggest trend I see is the increased interest in talking about corruption. This is not the same as saying that people are more interested in reducing corruption.

I think there is quite a lot of evidence suggesting that they are not. But people are certainly interested in telling other people how worried they are about corruption. It’s a bit like jewelry: It makes people feel distinguished.

In general, I would say that corruption exposes the managers and the organizations they work for. But it may also be quite profitable.

…in some markets there is no way of avoiding payment of bribes, except by exiting the market.

Zhuk, the business person in the case study will consider the bribes an additional tax he has to pay for doing business in Ukraine and carry on with his pet project. Make no mistake: That’s how the situation would play out in real life.

But should Zhuk pay off the officials? That’s tougher to answer. I know what Zhuk will do; I don’t know what he should do, because that’s a moral issue, and we don’t know from the case what Zhuk’s morality dictates.

What does Zhuk’s morality dictate? This is the question for people of conscience in every business category, followed by the implied question: Can a business compete when the other guys have no conscience about bending, stretching and breaking the rules? Especially if there are no apparent consequences for wrongdoing.

Of course the question is not limited to developing markets like Ukraine.

I asked a music industry executive if his company was expecting a call from Eliot Spitzer’s office any time soon. There was a pause on his end of the call. Mr. Spitzer, New York State Attorney General has made a name for himself (and quite a bit of controversy) taking big business to task for unfair practices, collecting billions of dollars in fines, reparations and settlements along the way. The music industry apparently presented a fairly easy target, having slipped back into comfortable payola ruts to gain product exposure. My industry friend said his company voluntarily stopped the practices targeted in Spitzer’s investigations and acknowledged that Spitzer has "taken tools away," complicating his (and everyone’s) ability to capture the attention of radio programmers and retailers.

Spitzer has spread his attention liberally to include pharmaceuticals, securities and insurance practices prompting BBC News to ask, "Is no target too big for Eliot Spitzer?"

I don’t mean this to be an apologetic for Eliot Spitzer – it’s just that, outside the federal government, he stands almost alone. Inside the federal government, the Securities and Exchange Commission, Department of Justice and United States Congress have swung the cannon around on corruption, and brought the attention of the mass media with them. The result is a public record of the misdeeds of Enron’s Lay and Skilling . . . Worldcom’s Ebbers . . . Accounting giant Arthur Andersen . . . Tyco’s Kozlowski and Swartz . . . Jack Abramoff’s gang . . . this list is not yet complete.

Two thirds of respondents in a Transparency International 62-nation survey believe the business environment is corrupted to a moderate or large extent. A 2005 report by the Federal Reserve Bank of Dallas (Racing to the Top: How Global Competition Disciplines Public Policy) indexes strong economic indicators to 12 policy assets – one of which is strong anticorruption policies. You don’t have to buy the bank’s whole analysis to recognize patterns in the data – that corruption raises prices, increases uncertainty, inhibits competition and has a chilling effect on the economies that tolerate it.

"I know what Zhuk will do;" Harvard’s Rafael Di Tella wrote, "I don’t know what he should do, because that’s a moral issue, and we don’t know from the case what Zhuk’s morality dictates." It seems to me it is in everyone’s interest to announce unflinchingly what our morality dictates and practice our own oversight, office by office, deal by deal, unit by unit, company by company. Oh, I hear the snickering . . . to which I reply, Fair competition is a pipe dream only if we say it is; only if we allow it to be.

[For more on the subject, check out Donald McGilchrist's bibliography, Throwing the Book at Corruption.]