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Corruption and socially optimal entry

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  • Amir, Rabah
  • Burr, Chrystie

Abstract

The paper investigates the effects of corruption in the entry-certifying process on market structure and social welfare for a Cournot industry with linear demand and costs. To gain entry, a firm must pay a bribe-maximizing official a fixed percentage of anticipated profit, in addition to the usual set-up cost. This would lead to a monopoly, but only in markets without pre-existing or shadow-economy firms. A benevolent social planner may preempt the harmful effects of corruption by either manipulating the number of pre-existing firms in the market, or by setting up two independent (corrupt) licensing authorities. A socially optimal number of firms in the market may be reached by choosing the right number of pre-existing firms or by having exactly two licensing authorities. These mechanisms may be seen as restoring second-best efficiency in settings characterized by two major sources of distortion: Imperfect competition and corruption. We also show in an extension that the basic insights carry over in a qualitative sense to a model with quadratic costs and first best entry regulation.

Suggested Citation

  • Amir, Rabah & Burr, Chrystie, 2015. "Corruption and socially optimal entry," Journal of Public Economics, Elsevier, vol. 123(C), pages 30-41.
    • Handle: RePEc:eee:pubeco:v:123:y:2015:i:c:p:30-41
    DOI: 10.1016/j.jpubeco.2014.12.012
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    References listed on IDEAS

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    More about this item

    Keywords

    Industrial organization of corruption; Free entry; Second best entry; First best entry; Corruption and market outcomes; Corruption and imperfect competition;
    All these keywords.

    JEL classification:

    • H82 - Public Economics - - Miscellaneous Issues - - - Governmental Property
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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