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Control rights, bureaucratic corruption and the allocation of resources

Abstract

In a two-sector model, we show that corruption is endogenously determined by the model parameters. It depends on the fraction of unskilled labor and the relative TFP differential between skilled and unskilled sector. First, for a larger proportion of unskilled labor force, there is widespread corruption and for smaller share of unskilled labor force, there is no corruption. For the intermediate level, equilibrium depends on the number of corrupt bureaucrats and there are multiple equilibria. Second, corruption decreases with the relative TFP differential between skilled and unskilled sector. For the intermediate level of TFP differential, there are multiple equilibria. On its consequences, corruption causes rise in the wage inequality between skilled and unskilled workers. It distorts the allocation of resources, which results in the output and the welfare losses, and it is associated with the higher tax rate.

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Notes

  1. All the data is taken from World Bank’s Enterprise Surveys http://www.enterprisesurveys.org/.

  2. See Jain (2001) and Bardhan (1997, 2006) for detailed discussion.

  3. http://www.enterprisesurvey.org.

  4. The optimal policy could include some penalty for corrupt bureaucrats, but that is not the focus here.

  5. The government may offer an efficiency wage to get rid of corruption but that may or may not be cost effective for it (as Besley and McLaren 1993 show). And since, here corruption is without theft, therefore we restrain ourselves not to induldge into government’s optimal wage policy problem.

  6. We assume that the amount of bribes recovered from the corrupt bureaucrats is dissipated and it does not appear in the budget constraint of the government.

  7. See Tanzi and Davoodi (2000) for details.

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Acknowledgments

I am grateful to Tanguy van Ypersele, Cecilia García-Peñalosa, Patrick Pintus and to seminar participants at GREQAM for their useful comments and suggestions. I would especially like to thank anonymous referee for his helpful suggestions.

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Correspondence to Waqar Ahmed Wadho.

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Wadho, W.A. Control rights, bureaucratic corruption and the allocation of resources. Eur J Law Econ 35, 41–59 (2013). https://doi.org/10.1007/s10657-010-9185-8

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  • DOI: https://doi.org/10.1007/s10657-010-9185-8

Keywords

  • Control rights
  • Bureaucratic corruption
  • Resource allocation
  • TFP differential
  • Wage inequality

JEL Classifications

  • D73
  • H32
  • I31
  • J31