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 showing how corruption may lead to an increased administrative burden in firm-government interactions. The model highlights the importance of the information setting of the 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 use red tape to extract more bribes from firms with higher WTP. To test the model’s prediction, I use 16 years of Enterprise Survey data from 151 countries containing 170,571 government-firm interactions. 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