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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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    Cited by:

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    2. Jacopo Bizzotto & Alessandro De Chiara, 2022. "Frequent audits and honest audits," Working Papers 202202, Oslo Metropolitan University, Oslo Business School.
    3. Amadou Amadou Boly & Kole Keita & Assi Okara & Guei Guei C. Okou, 2021. "Effect of corruption on educational quantity and quality : theory and evidence," Working Papers hal-03194726, HAL.
    4. Gaetano Carmeci & Luciano Mauro & Fabio Privileggi, 2021. "Growth maximizing government size, social capital, and corruption," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 438-461, June.
    5. de Pinto Marco & Goerke Laszlo, 2019. "Efficiency Wages in Cournot-Oligopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(4), pages 1-13, October.
    6. Ferrali, Romain, 2020. "Partners in crime? Corruption as a criminal network," Games and Economic Behavior, Elsevier, vol. 124(C), pages 319-353.
    7. Zhiyong (John) Liu & Zhewei Wang & Zhendong Yin, 2022. "When is duplication of effort a good thing in law enforcement?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(4), pages 682-708, August.
    8. Chiu Yu Ko & Bo Shen & Xuyao Zhang, 2023. "Can corruption encourage clean technology transfer?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(3), pages 459-492, June.
    9. Ronald Fischer & Nicolás Campos & Eduardo Engel & Alexander Galetovic, 2019. "Renegotiations and Corruption in Infrastructure: The Odebrecht Case," Documentos de Trabajo 346, Centro de Economía Aplicada, Universidad de Chile.
    10. Fonseca-Mairena, María Haydée & Triossi, Matteo, 2019. "Incentives and implementation in marriage markets with externalities," Economics Letters, Elsevier, vol. 185(C).
    11. Laszlo Goerke, 2017. "Tax evasion in a Cournot oligopoly with endogenous entry," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 754-779, September.
    12. Minbo Xu & Daniel Z. Li, 2019. "Equilibrium competition, social welfare and corruption in procurement auctions," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(3), pages 443-465, October.
    13. Roberto Burguet & Juan José Ganuza & José Garcia Montalvo, 2016. "The microeconomics of corruption. A review of thirty years of research," Economics Working Papers 1525, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Dimitrios Varvarigos & Eleni Stathopoulou, 2023. "On the relation between corruption and market competition," Economic Inquiry, Western Economic Association International, vol. 61(1), pages 99-121, January.
    15. Laszlo Goerke, 2022. "Partisan competition authorities, Cournot‐oligopoly, and endogenous market structure," Southern Economic Journal, John Wiley & Sons, vol. 89(1), pages 238-270, July.
    16. Hideki Sato, 2022. "Is it reasonable to legalize tea money?," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(2), pages 267-272, October.
    17. Xiao-Bo Zhou & Wei Wei & Chyi-Lu Jang & Chun-Ping Chang, 2019. "The Impacts Of Government R&D Expenditure On Innovation In Chinese Provinces: What’S The Role Of Corruption," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 21(3), pages 1-22, January.
    18. Lin Hu & Mandar Oak, 2023. "Can asymmetric punishment deter endogenous bribery," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 3-21, January.
    19. Soham Baksi & Pinaki Bose, 2023. "Bribery, Reneging, and Competition Among Bureaucrats," Departmental Working Papers 2023-01, The University of Winnipeg, Department of Economics.
    20. Wang, Leonard F.S., 2016. "Do industrial and trade policy lead to excess entry and social inefficiency?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 354-362.
    21. Rupayan Pal & Preksha Jain & Prasenjit Banerjee, 2022. "The Environment and corruption: Monetary vs. Non-monetary Incentives and the first best," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-011, Indira Gandhi Institute of Development Research, Mumbai, India.
    22. Hong, Fuhai & Yin, Zhendong, 2020. "Collusion, extortion and the government’s organizational structure," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 1-23.
    23. Jun Wen & Mingbo Zheng & Gen-Fu Feng & Sunwu Winfred Chen & Chun-Ping Chang, 2018. "Corruption And Innovation: Linear And Nonlinear Investigations Of Oecd Countries," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 103-129, July.
    24. Preksha Jain & Rupayan Pal, 2023. "Corruption-proof minimum regulation for `Zero emission': Status incentives - Bane or boon?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2023-009, Indira Gandhi Institute of Development Research, Mumbai, India.
    25. Wang, Shuhong & Zhao, Danqing & Chen, Hanxue, 2020. "Government corruption, resource misallocation, and ecological efficiency," Energy Economics, Elsevier, vol. 85(C).

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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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