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"Corruption"

Andrei Schleifer and Robert Vishny

August 1993

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

1 / 11

Overview

Previous articles discuss corruption as a Principal-Agent problem This paper focusses on the consequences of corruption for resource allocation What are the implications of the way corruption is organized? Why does corruption have worse consequences than taxation? De...nition: the sale of government property for personal gain.

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

2 / 11

Basic Model

One government produced good (e.g. passport, import license) with price p and demand curve D (p ) Sold by o¢ cial who can restrict the quantity sold No restriction or punishment from above No cost to o¢ cial to producing good What is the marginal cost to the o¢ cial ?

,! for "corruption without theft" it is p ,! for "corruption with theft" it is 0

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

3 / 11

Observations: why corruption spreads

Corruption without theft is equivalent to optimal commodity taxation, except that the revenue is kept by the o¢ cial

,! if this is understood, then could pay them this way ,! but then people willing to be corrupt are more likely to take the job

Corruption with theft spreads due to competition amongst buyers

,! if one buyer of a permit reduces his costs through bribery, his rivals must do the same to compete ,! not true for corruption without theft

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

4 / 11

The Industrial Organization of Corruption

Suppose now buyers need several complementary goods Alternative ways of organizing government agencies (1) monopolist agency (e.g. communist Russia) (2) independent agencies (e.g. India, post-1991 Russia, Africa) (3) each good supplied by at least 2 agencies

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

5 / 11

Monopolist Agency o¤ering complementary goods

Two "bribe prices" p1 and p2 and quantities x1 and x2 Marginal costs C1 and C2 Monopolist (benchmark) would solve max R (x1 , x2 )

x1 ,x2

C1 x1

C2 x2

,! FOCs are

MR1 + MR2 MR1 dx2 dx1

= C1

dx1 + MR2 = C2 dx2

dx2 dx1

If the two goods are complements then

> 0 and so

MR1 < C1 and MR2 < C2

,! monopolist agency keeps the bribe on each good down to expand the demand for the other

Andrei Schleifer and Robert Vishny () Corruption August 1993 6 / 11

Two Independent Agencies (Oligopoly)

=0 ,! hence MRi = Ci ) bribe is higher and output lower

Each agency takes the other' output as given: s Also implies a lower aggregate level of bribes By acting independently, the two agencies hurt each other and the buyers

dx2 dx1

,! worse than monopoly

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

7 / 11

Each good supplied by more than one independent agency

Competition drives bribes down to zero

,! analogous to tax competition amongst provinces

Policy implication: create competition in the provision of public goods

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

8 / 11

Corruption and Secrecy

Why is corruption di¤erent from taxation in terms of its e¤ect on resource allocation?

,! it is illegal and must be kept secret

Taking bribes without being detected is easier for some goods than others

,! o¢ cials may induce substitution into goods where detection is harder ,! this may be very distortionary and socially costly

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

9 / 11

Example: Bottle making factory in Mozambique

Decision to invest in new technology, ...nanced by outside donors Buying a unique (advanced) technology o¤ers an opportunity for corruption

,! seller may be happy to overcharge and o¤er kick-backs

With a generic machines, donors require consideration of several competing o¤ers

,! little opportunity for such corruption

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

10 / 11

Implications

Explains import of advanced rather than "appropriate" technology by LDC governments

,! infrastructure and defence, vs. education and health

Also, the need for secrecy causes o¢ cials to limit entry and restrict information

,! less innovation

Andrei Schleifer and Robert Vishny ()

Corruption

August 1993

11 / 11

Information

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