Rent-Seeking and Reform: Relationship Revisited

The paper revisits the relationship been reform and corruption. We consider a scenario where less efficient domestic and more efficient foreign firms engaged in Cournot competition bribe the local authorities. The local firm pays for imposing a cost to the foreigners, the foreign firm pays so that the local competitor does not get overwhelming advantage. Local authorities, political or otherwise, decide an optimal level of ‘cost’ to be inflicted on the foreign firms which maximize their pay-offs from both. We show that in this set up we may have an equilibrium where drastic reform will be consistent with maximizing rent and therefore an aggressively reformist policy maker can turn out to be extremely corrupt. Interestingly this also exhibits the case where consumers’ welfare increases with reform, although local producers suffer. In general policy makers decision to choose moderate or drastic reforms depend on the degree of efficiency of the local firm.