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Corruption, Pricing of Public Services and Entrepreneurship in Economies with Leakage

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  • Mukherjee, Vivekananda
  • Mitra, Siddhartha
  • Banerjee, Swapnendu

Abstract

The paper presents a theoretical model with bureaucratic corruption where bribe income can leak out of an economy. In such an economy given its perception about the extent of leakage the government sets the price of public services required for entrepreneurship by maximizing the welfare of the economy. We show that the corruption persists at the equilibrium. The government prices its services at a level higher than their unit cost of provision in high leakage economies. However, the price falls to unit cost level in more prosperous economies. We also find that the number of entrepreneurs starting business and the total income received as bribe are non-increasing functions of the prosperity level and the extent of leakage from the economy. The predictions of the model generate interesting policy implications: for example it clearly shows that in low prosperity economies the control of leakage may induce higher level of corruption, while the opposite is true in the high prosperity economies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49049.

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Date of creation: Jun 2013
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Handle: RePEc:pra:mprapa:49049

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Related research

Keywords: Corruption; Leakage; Entrepreneurship; Pricing of Public Services;

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  1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  2. Aidis, Ruta & Estrin, Saul & Mickiewicz, Tomasz, 2009. "Entrepreneurial Entry: Which Institutions Matter?," IZA Discussion Papers 4123, Institute for the Study of Labor (IZA).
  3. Tirole, J., 1993. "The Internal Organization of Government," Working papers 93-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implications for Growth," NBER Working Papers 3530, National Bureau of Economic Research, Inc.
  5. Roy Thurik & Andreas Freytag, 2006. "Entrepreneurship and its determinants in a cross-country setting," Scales Research Reports H200616, EIM Business and Policy Research.
  6. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  7. Bardhan, Pranab, 2006. "The economist's approach to the problem of corruption," World Development, Elsevier, vol. 34(2), pages 341-348, February.
  8. Sanjeev Gupta & Hamid Davoodi & Rosa Alonso-Terme, 2002. "Does corruption affect income inequality and poverty?," Economics of Governance, Springer, vol. 3(1), pages 23-45, 03.
  9. Jakob Svensson, 2005. "Eight Questions about Corruption," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 19-42, Summer.
  10. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
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