Human capital and corruption: a microeconomic model of the bribes market with democratic contestability

To overcome market failures society creates common laws that stimulate or penalize individual actions, the enforcement of which depends on the actions of public authorities who may be susceptible to corruption. Thus, a new market emerges where ‘influences’ are traded. Legislators have incentives to deviate from the goal of efficiency and produce laws that maximize the gains that can be expected from bribes. We model this behaviour for an autocracy versus a democracy, using a microeconomic framework. We assume that in an autocracy rulers have a monopoly over the bribes market, whereas in a democracy conflicting groups compete in the bribes market. In order to bring about the downfall of the incumbent rulers, these groups inform voters of the rulers' deviant actions so that, by a stochastic process, they convince voters of the existence of bribes and therefore gain their votes. The models constructed produce results that are compatible with the well-known stylized facts, namely that (1) in a democracy the level of corruption is lower than in an autocracy, although still positive, that (2) in environments where the level of human capital is higher (the proxy for the voters’ receptivity to the efforts of the opposition), regimes are closer to democracies and the level of corruption is lower, and that (3) the level of corruption is higher in more regulated economies.