IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_334.html
   My bibliography  Save this paper

The Dynamics of Corruption with the Ratchet Effect

Author

Listed:
  • Jay Pil Choi
  • Marcel Thum

Abstract

This paper provides a simple model of corruption dynamics with the ratchet effect. As in Shleifer and Vishny [1993], we consider the sale of government property (entry permit) by government officials as the prototype of corruption activities. In a dynamic version of the Shleifer-Vishny model, corrupt officials have ex post the incentive to price discriminate entrepreneurs based on the entry decisions made in an earlier period. We show that the inability of government officials to commit to future money demands induces the ratchet effect in that entrepreneurs have incentives to delay entry in order to receive a discount in the permit price later. The ex post opportunism erodes the official's extortion power and reduces his revenues from selling permits. Even though the dynamic setting leaves the corrupt official with less extortion power, we cannot rule out the possibility that the official's ability to apply dynamic discrimination decreases the intertemporal aggregate social welfare. We also explore the effect of the official's tenure stability on the extent of corruption. This allows us to identify circumstances under which the often observed practice of job rotation can help mitigate corruption.

Suggested Citation

  • Jay Pil Choi & Marcel Thum, 2000. "The Dynamics of Corruption with the Ratchet Effect," CESifo Working Paper Series 334, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_334
    as

    Download full text from publisher

    File URL: http://www.cesifo-group.de/DocDL/334.PDF
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
    2. Jay Pil Choi & Marcel Thum, 2004. "The Economics of Repeated Extortion," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 203-223, Summer.
    3. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
    4. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-1023, October.
    5. Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, vol. 59(1), pages 69-93, January.
    6. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-1175, September.
    7. Thierry Verdier & Daron Acemoglu, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March.
    8. Thum, Claudio & Thum, Marcel, 2001. " Repeated Interaction and the Public Provision of Private Goods," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 625-643, December.
    9. Malueg, David A & Solow, John L, 1989. "A Note on Welfare in the Durable-Goods Monopoly," Economica, London School of Economics and Political Science, vol. 56(224), pages 523-527, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jay Pil Choi & Marcel Thum, 2004. "The Economics of Repeated Extortion," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 203-223, Summer.
    2. 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.
    3. Bibhas Saha & Trivikraman Thampy, 2004. "Corruption, Default and Optimal Credit in Welfare Programs," Microeconomics Working Papers 22392, East Asian Bureau of Economic Research.
    4. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    5. Saha, Bibhas & Thampy, Trivikraman, 2006. "Extractive bribe and default in subsidized credit programs," Journal of Economic Behavior & Organization, Elsevier, vol. 60(2), pages 182-204, June.
    6. Jay Choi & Marcel Thum, 2009. "The economics of politically-connected firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(5), pages 605-620, October.
    7. Thum, Marcel, 2005. "Korruption und Schattenwirtschaft," Dresden Discussion Paper Series in Economics 09/05, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    8. Strand, Jon, 2005. "Tax distortions, household production, and black-market work," European Journal of Political Economy, Elsevier, vol. 21(4), pages 851-871, December.
    9. Ahlin, Christian & Bose, Pinaki, 2007. "Bribery, inefficiency, and bureaucratic delay," Journal of Development Economics, Elsevier, vol. 84(1), pages 465-486, September.
    10. repec:eee:eecrev:v:98:y:2017:i:c:p:424-441 is not listed on IDEAS
    11. repec:bla:germec:v:18:y:2017:i:3:p:283-301 is not listed on IDEAS
    12. Newton, Jonathan & Wait, Andrew & Angus, Simon D., 2016. "Watercooler chat, organizational structure and corporate culture," Working Papers 2016-03, University of Sydney, School of Economics.
    13. André Seidel & Marcel Thum, 2016. "Tax Evasion, Corruption and Market Entry," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(4), pages 377-398, September.
    14. Rafael Di Tella & Robert MacCulloch, 2009. "Why Doesn't Capitalism Flow to Poor Countries?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 285-332.
    15. Thum, Marcel, 2004. "Korruption," Dresden Discussion Paper Series in Economics 11/04, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    16. Cardella, Eric & Depew, Briggs, 2016. "Testing for the Ratchet Effect: Evidence from a Real-Effort Work Task," IZA Discussion Papers 9981, Institute for the Study of Labor (IZA).
    17. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    18. Francisco Azpitarte, 2011. "Can corruption constrain the size of governments?," European Journal of Law and Economics, Springer, vol. 32(1), pages 1-14, August.
    19. Bel, Roland & Smirnov, Vladimir & Wait, Andrew, 2015. "Team composition, worker effort and welfare," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 1-8.
    20. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    21. Jay Pil Choi & Marcel Thum, 2005. "Corruption And The Shadow Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 817-836, August.
    22. repec:eee:gamebe:v:107:y:2018:i:c:p:182-202 is not listed on IDEAS
    23. Amir, Rabah & Burr, Chrystie, 2015. "Corruption and socially optimal entry," Journal of Public Economics, Elsevier, vol. 123(C), pages 30-41.
    24. Bel, Roland & Smirnov, Vladimir & Wait, Andrew, 2012. "On Broadway and strip malls: how to make a winning team," Working Papers 2012-14, University of Sydney, School of Economics.
    25. Sugata Marjit & André Seidel & Marcel Thum, 2017. "Tax Evasion, Corruption and Tax Loopholes," German Economic Review, Verein für Socialpolitik, vol. 18(3), pages 283-301, August.

    More about this item

    Keywords

    Corruption dynamics; ratchet effect; ex post opportunism; dynamic consistency;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_334. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe). General contact details of provider: http://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.