Corruption and Bureaucratic Structure in a Developing Economy

43 Pages Posted: 13 Jun 2006

See all articles by John Bennett

John Bennett

Brunel University London - Economics and Finance; Institute for the Study of Labor (IZA); University of Wales, Swansea - School of Business and Economics; Centre for Economic Policy Research (CEPR)

Saul Estrin

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: June 2006

Abstract

We address the impact of corruption in a developing economy in the context of an empirically relevant hold-up problem - when a foreign firm sinks an investment to provide infrastructure services. We focus on the structure of the economy's bureaucracy, which can be centralized or decentralized, and characterize the "corruptibility" of bureaucrats in each case. Results are explained in terms of the non-internalization, under decentralization, of the "bribe externality" and the "price externality." In welfare terms, decentralization is favoured, relatively speaking, if the tax system is less inefficient, funding is less tight, bureaucrats are less venal, or compensation for expropriation is ungenerous.

Keywords: corruption, bureaucratic structure, developing economy

JEL Classification: D73, H11, H77

Suggested Citation

Bennett, John and Estrin, Saul, Corruption and Bureaucratic Structure in a Developing Economy (June 2006). IZA Discussion Paper No. 2156. Available at SSRN: https://ssrn.com/abstract=908246

John Bennett (Contact Author)

Brunel University London - Economics and Finance ( email )

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+44 1895 816 201 (Phone)
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Institute for the Study of Labor (IZA)

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University of Wales, Swansea - School of Business and Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Saul Estrin

London School of Economics & Political Science (LSE) ( email )

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United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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