Is More Competition Always Better? An Experimental Study of Extortionary Corruption

Abstract

We test the effectiveness of an anti-corruption policy that is often discussed among practitioners: an increase in competition among officials providing the same good or service. In particular, we investigate whether an increase in overlapping jurisdictions reduces extortionary corruption, i.e., bribe demands for the provision of services that clients are entitled to receive. We overcome measurement and identification problems by addressing our research question in the laboratory. We conduct an extortionary bribery experiment where clients apply for a license from one of many available offices and officials can demand a bribe on top of the license fee. By manipulating the number of available offices and the size of search costs we are able to assess whether increasing competition reduces extortionary corruption. We find that, if search costs are unaffected, increasing the number of providers may actually increase corruption. In particular, our results show that increasing competition has either no effect (if search costs are high) or a positive effect (if search costs are low) on bribe demands. We compare our findings to those obtained in a standard market environment and find evidence of different search behaviors in the two settings.

Keywords: Competition, Extortionary Corruption, Experiment

JEL Classification: D73, D49, C91