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Corruption, Pricing of Public Services, and Entrepreneurship in Economies with Leakage

Author

Listed:
  • Vivekananda Mukherjee
  • Siddhartha Mitra
  • Swapnendu Banerjee

Abstract

The paper presents a theoretical model of an economy with bureaucratic corruption where bribe income can leak out of the economy. In a high-leakage economy, a welfare-maximizing government sets the price of public services above the unit cost of provision, which deters entrepreneurship, whereas in more prosperous economies the price falls to the unit cost level. In both cases, the government allows some degree of corruption. The model generates interesting policy implications: In low-prosperity economies the control of leakage may induce a higher level of corruption, while in high-prosperity economies it is an ineffective instrument in controlling corruption. The above findings are robust across specifications.

Suggested Citation

  • Vivekananda Mukherjee & Siddhartha Mitra & Swapnendu Banerjee, 2020. "Corruption, Pricing of Public Services, and Entrepreneurship in Economies with Leakage," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(4), pages 595-619.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2020-0043
    DOI: 10.1628/jite-2020-0043
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    References listed on IDEAS

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    More about this item

    Keywords

    corruption; leakage; entrepreneurship; pricing of public services;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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