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A Search-Theoretic Model of Bureaucracy and Corruption

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Author Info
Shouyong Shi
Ted Temzelides

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Abstract

We analyze bureaucracy and corruption in a market with decentralized exchange and <93>lemons.<94> Exchange is modelled as a sequence of bilateral, random matches. Agents have private information about the quality of goods they produce and can supplement trade with socially inefficient bribes. Bureaucracy is modelled as a group of agents similar to private agents, but who enjoy centralized production and consumption. Transaction patterns between the bureaucracy and the private sector are fully endogenous. Our main finding is that centralized production and consumption in the bureaucracy also gives rise to low power incentives for the individual bureaucrats. As a result, we find conditions under which private agents bribe bureaucrats, while they do not bribe each other. An equilibrium with corruption and an equilibrium without corruption can co-exist. We discuss some welfare implications of the model.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number shouyong-03-02.

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Length: 42 pages
Date of creation: 11 Jul 2003
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Handle: RePEc:tor:tecipa:shouyong-03-02

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Related research
Keywords: Bureaucracy; Corruption; Search; Private Information.;

Other versions of this item:

Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
H00 - Public Economics - - General - - - General

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  1. Cadot, Olivier, 1987. "Corruption as a gamble," Journal of Public Economics, Elsevier, vol. 33(2), pages 223-244, July. [Downloadable!] (restricted)
  2. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-14, May. [Downloadable!] (restricted)
  3. Lui, Francis T., 1986. "A dynamic model of corruption deterrence," Journal of Public Economics, Elsevier, vol. 31(2), pages 215-236, November. [Downloadable!] (restricted)
  4. Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August. [Downloadable!] (restricted)
  5. Engineer, Merwan & Shouying Shi, 1998. "Asymmetry, imperfectly transferable utility, and the role of fiat money in improving terms of trade," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 153-183, February. [Downloadable!] (restricted)
  6. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-81, August. [Downloadable!] (restricted)
  7. Andrei Shleifer & Robert W. Vishny, 1993. "Corruption," NBER Working Papers 4372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Steve Williamson & Randall Wright, 1991. "Barter and monetary exchange under private information," Staff Report 141, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  9. Daron Acemoglu & Thierry Verdier, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March. [Downloadable!] (restricted)
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  10. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August. [Downloadable!] (restricted)
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