Working Paper: CEPR ID: DP3972
Authors: Sergei Guriev
Abstract: We study the emergence and interaction of red tape and corruption in a principal-bureaucrat-agent hierarchy. The principal is to provide the agent with a unit of a good that involves externalities so that market mechanisms fail to achieve first best. Red tape partially solves the problem. While imposing a cost on the agent, red tape also produces information about the agent’s type. Therefore the socially-optimal level of red tape is not trivial. It is hard, however, to implement the social optimum if the bureaucrat in charge of red tape is corrupt. We consider two types of corruption. First, the bureaucrat may extort bribes from the agent in exchange for reducing the amount of red tape. Second, the bureaucrat may take bribes to conceal the information produced through red tape. The former kind of corruption tends to reduce red tape, while the latter provides incentives for excessive red tape: the more red tape, the more likely the bureaucrat can get the bribes ex post. We show that the latter effect prevails, and the equilibrium level of red tape is always above the social optimum.
Keywords: corruption; red tape; three-tier hierarchy
JEL Codes: D73; K42; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ex ante corruption (H57) | reduction in red tape (L59) |
| ex post corruption (H57) | excessive red tape (D73) |
| ex post corruption (H57) | equilibrium level of red tape above social optimum (H21) |
| bureaucrat benefits from information provided by red tape (D73) | equilibrium level of red tape above social optimum (H21) |
| principal's attempts to prevent ex post corruption (H57) | overproduction of red tape (D73) |