Legalization of Bribe Giving when Bribe Type Is Endogenous

A recent paper, Basu argues that for a class of bribes, called harassment bribes, legalization of bribe giving, but not bribe taking, will reduce bribery. We examine the applicability of Basu's insight in an environment in which the type of the bribe—harassment or nonharassment—is endogenously determined, and it is not feasible to legalize the giving of nonharassment bribes. We find that in such an environment Basu's proposal, in and of itself, yields mixed results: in one case it reduces even the prevalence of nonharassment bribes, and improves social welfare. However, in another case it is shown to be counter-productive, i.e., it reduces social welfare while failing to eliminate bribery. Our analysis finds parameter values that determine which of the two cases will prevail, and points to additional policies aimed at strengthening the legal institutions which, in conjunction with Basu's proposal, will help reduce bribery.