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Prohibition versus Taxation in Corrupt Environments

Author

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  • Desiree A. Desierto
  • John V. C. Nye

Abstract

If corruption is rife and tolerated by society, prohibiting the production of a good with negative social costs may be more efficient at limiting quantity than legalizing and taxing producers. It becomes incentive-compatible for a corrupt government to enforce prohibition and credibly limit supply in order to extract bribes from illegal producers. In equilibrium, total quantity is low. In contrast, when the good is legal and taxed, a corrupt government can extract rents only by expropriating the tax revenues. Thus, it prefers a larger market in order to generate more taxes, and quantity is higher.

Suggested Citation

  • Desiree A. Desierto & John V. C. Nye, 2017. "Prohibition versus Taxation in Corrupt Environments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 173(2), pages 239-252, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201706)173:2_239:pvtice_2.0.tx_2-j
    DOI: 10.1628/093245616X14618208477808
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    Cited by:

    1. Li, Yongjian & Feng, Lipan & Govindan, Kannan & Xu, Fangchao, 2019. "Effects of a secondary market on original equipment manufactures’ pricing, trade-in remanufacturing, and entry decisions," European Journal of Operational Research, Elsevier, vol. 279(3), pages 751-766.
    2. Koyama, Mark & Desierto, Desiree, 2020. "The Political Economy of Status Competition: Sumptuary Laws in Preindustrial Europe," CEPR Discussion Papers 14407, C.E.P.R. Discussion Papers.
    3. Adeleke, Olaitan & McSharry, Patrick E., 2022. "Female enrollment, child mortality and corruption are good predictors of a country’s UN Education Index," International Journal of Educational Development, Elsevier, vol. 90(C).
    4. Juan Carlos Henao & Aníbal Rafael Zárate, 2018. "Corrupción en Colombia Tomo 4 Corrupción, Estado e instrumentos jurídicos," Books, Universidad Externado de Colombia, Facultad de Derecho, number 1027, October.
    5. Ho, Shirley S. & Looi, Jiemin & Chuah, Agnes S.F. & Leong, Alisius D. & Pang, Natalie, 2018. "“I can live with nuclear energy if…”: Exploring public perceptions of nuclear energy in Singapore," Energy Policy, Elsevier, vol. 120(C), pages 436-447.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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