A Model of Corruption and Heterogeneous Productivity: A Theoretical Approach

We consider a model of corruption in which agents are heterogeneous in their productivity and examine the relationship between productivity and bribery behaviors. There are two types of technologies such that the good technology is costly but yields a positive externality to the economy, whereas the bad technology is costless but does not generate the positive externality. Because the government cannot perfectly monitor which technology is used, bureaucrats and entrepreneurs may engage in bribes to utilize the bad technology. In equilibrium, there are three regimes possible: (1) all entrepreneurs use good technology; (2) all entrepreneurs use bad technology; and (3) the relatively more productive entrepreneurs use bad technology. We show that the equilibrium is unique, while our dynamic analysis demonstrates that the equilibrium converges to the clean regime, where all entrepreneurs employ the good technology as the state capacity increases over time.