The Industrial Organization of Corruption: Monopoly, Competition and Collusion

We study how the introduction of competition between public officials for the provision of a given license affects extortionary corruption, i.e., the demands of harassment bribes. We conduct a laboratory experiment where citizens need to obtain licenses from public officials, and officials can demand a bribe on top of the license official fee. We first provide officials with monopoly power by giving citizens no choice but to pay the bribe to their assigned official. We then introduce competition among officials by allowing citizens to engage in costly search and get the license from any of the available offices. We examine transactions that are likely to be one-shot, such as the delivery of a drivers' license, and transactions that require frequent interactions between the parties and therefore allow for reputation building, such as yearly renewals of building permits. Finally, we examine officials' ability to collude by communicating before setting their bribe demands. We find that introducing competition significantly reduces corruption both in settings characterized by one-shot and by repeated interactions between citizens and officials. While the possibility to collusion lowers the effectiveness of competition, officials are unable to sustain collusion in the long run.