Understanding Informal Payments in the Public Sector: Theory and Evidence from Nineteenth‐century S weden

Informal payments for public services such as health care are a major problem in many countries around the world. Explanations for their prevalence include cultural factors, lack of enforcement as well as insufficient funds and low wages for public employees. This paper analyzes the phenomenon from an economic perspective, arguing that they are a logical consequence of low wages in the public sector. However, informal payments from citizens to public employees for services may be preferable to a situation in which no services are delivered. Given that the informal payments thus can be seen to have a functional element, and that reforms aimed at eliminating them largely have been unsuccessful, formalization and legalization rather than increased enforcement may be a way forward. Many government employees in nineteenth‐century S weden received their salary through semi‐informal payments (‘sportler’) from citizens. A case study reveals that politicians at the time reasoned along the lines of what could be expected from economic theory: although undesirable and problematic, sportler were necessary to finance the wages of the government employees, given the lack of tax revenue and monitoring capabilities. In contrast to previous research, this article argues that reform efforts were aimed at pragmatically improving the existing system through formalization and regulation rather than simply prohibiting the informal payments.