We study the emergence and interaction of red tape and corruption in a principal-bureaucrat-agent hierarchy. The principal is to provide the agent with a unit of a good that involves externalities so that market mechanisms fail to achieve first best. Red tape partially solves the problem. While imposing a cost on the agent, red tape also produces information about the agent’s type. Therefore the socially optimal level of red tape is not trivial. It is hard, however, to implement the social optimum if the bureaucrat in charge of red tape is corrupt. We consider two types of corruption. First, the bureaucrat may extort bribes from the agent in exchange for reducing the amount of red tape. Second, the bureaucrat may take bribes to conceal the information produced through red tape. The former kind of corruption tends to reduce red tape, while the latter provides incentives for excessive red tape: the more red tape, the more likely the bureaucrat can get the bribes ex post. We show that the latter effect prevails, and the equilibrium level of red tape is always above the social optimum.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3972.
Find related papers by JEL classification: D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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