When Does Corruption Cause Red Tape? Bribe Discrimination Under Asymmetric Information

Abstract

Under what circumstances does corruption cause inefficiencies, and when are bribes merely a transfer? I propose a modified monopoly price discrimination model that shows under what circumstances corruption leads to an inefficiently high administrative burden in firm-government interactions. The model highlights the importance of the information setting of the firm-government interaction. When the government official knows the firms' Willingness To Pay (WTP) to avoid administrative burden, the interaction will have a Pareto efficient level of administrative burden with perfect price (i.e. bribe) discrimination. Without information about the firms' WTP, the government official uses red tape to extract more bribes from firms with higher WTP, causing inefficiently high levels of administrative burden. To test the model’s prediction, I use data on 186,277 government-firm interactions from 18 years of the Enterprise Survey covering 158 countries. Consistent with the model's predictions I find that corruption leads to increased administrative burden when government officials have less information about the firm's WTP and that the effect is larger for firms with a low WTP. This has several policy implications for where to focus anti-corruption efforts and how to reduce administrative burden.

JEL Classification: D02, D73, H83, O10