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

Author

Listed:
  • Mukherjee, Vivekananda
  • Mitra, Siddhartha
  • Banerjee, Swapnendu

Abstract

The paper presents a theoretical model with bureaucratic corruption where bribe income can leak out of an economy. In such an economy given its perception about the extent of leakage the government sets the price of public services required for entrepreneurship by maximizing the welfare of the economy. We show that the corruption persists at the equilibrium. The government prices its services at a level higher than their unit cost of provision in high leakage economies. However, the price falls to unit cost level in more prosperous economies. We also find that the number of entrepreneurs starting business and the total income received as bribe are non-increasing functions of the prosperity level and the extent of leakage from the economy. The predictions of the model generate interesting policy implications: for example it clearly shows that in low prosperity economies the control of leakage may induce higher level of corruption, while the opposite is true in the high prosperity economies.

Suggested Citation

  • Mukherjee, Vivekananda & Mitra, Siddhartha & Banerjee, Swapnendu, 2013. "Corruption, Pricing of Public Services and Entrepreneurship in Economies with Leakage," MPRA Paper 49049, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49049
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    File URL: https://mpra.ub.uni-muenchen.de/49049/1/MPRA_paper_49049.pdf
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    References listed on IDEAS

    as
    1. Andreas Freytag & Roy Thurik, 2007. "Entrepreneurship and its determinants in a cross-country setting," Journal of Evolutionary Economics, Springer, vol. 17(2), pages 117-131, April.
    2. Tirole, Jean, 1994. "The Internal Organization of Government," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 1-29, January.
    3. Bardhan, Pranab, 2006. "The economist's approach to the problem of corruption," World Development, Elsevier, vol. 34(2), pages 341-348, February.
    4. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
    5. Jakob Svensson, 2005. "Eight Questions about Corruption," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 19-42, Summer.
    6. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 503-530.
    7. Aidis, Ruta & Estrin, Saul & Mickiewicz, Tomasz, 2009. "Entrepreneurial Entry: Which Institutions Matter?," IZA Discussion Papers 4123, Institute for the Study of Labor (IZA).
    8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    9. Sanjeev Gupta & Hamid Davoodi & Rosa Alonso-Terme, 2002. "Does corruption affect income inequality and poverty?," Economics of Governance, Springer, vol. 3(1), pages 23-45, March.
    10. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Corruption; Leakage; Entrepreneurship; Pricing of Public Services;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • 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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