Bohan

Dealing with Corruption Through Microeconomic Methods: A Survey

Bohan Huang October 18, 2021

Abstract

Corruption, a common economic phenomenon often found in developing countries, is one of the leading factors that hinder economic transaction and growth, thus considered to be an important topic in development economics. This survey introduces several different approaches in analyzing and dealing with corruption, all based on microeconomic theory framework. The papers to be introduced are briefly described in this abstract.

1.1 A Basic Principal-Agent Model of Corruption

Ackerman(1975) explores how market structure and government preferences can influence the incidence of corruption. First, the government contracting official chooses from identical or homogeneous sellers. Government preferences are assumed to be well-defined if products are differentiated. Then, the assumption of well-defined preferences is switched dropped so that there is uncertainty in its preference. Lastly, the case of bilateral monopoly is considered.

1.2 Asymmetric Punishment Instrument

Basu et al(2016) introduces the solution called ”asymmetric punishment”, i.e, penalizing parties involved to different degrees to reduce bribe or weaken collusion. They study a situation in which the government official demand a bribe from entrepreneur seeking approval of a licence. They employ the Nash Bargaining method to determine the equilibrium bribe size. Then they summarize the impact of asymmetric punishment across parameter regions and finally discuss the optimal punishment design.

1.3 Petty Corruption: A Game-Theoretic Approach

The next two papers study petty corruption in particular, which involves low level bureaucrat’s bribery behavior in smaller scale. Bribery interventions are distinguished to be extortion and capture, thus depending on the quality of the project. The model is complicated by the presence of a track of at least two bureaucrats that approve the projects. At any point when the entrepreneur refuses to pay the bribe, the project is not proved and all the application fees plus bribe paid before are lost. Different equilibria are derived and their welfare implications are discussed in Lambert-Mogiliansky et al(2008).

1.4 Petty Corruption: An Information Design Approach

Dannay(2019) considers a model involving three players including government, bureaucrat and firm. The firm has a project with potential profit which is firm’s private information while its distribution is known by other players. The bureaucrat decides whether to ask for a bribe in approving the project and face the risk of being laid off when the bribery request is reported. The optimal bribe demand is first calculated, and is decreasing with salary. Given this inferred strategy, the government determines the optimal salary that maximizes bureaucrat’s utility. Then the information design model in which bureaucrat is the receiver and government is the sender is developed. Government designs the information to be collected in the administrative form handed to bureaucrat to be filled out by firms during the application process. The results from both cases are compared. Information design enhances the expected profit of a firm wile reducing the optimal wage for bureaucrat.

References

Rose-Ackerman, S. (1975). The economics of corruption. Journal of Public economics, 4(2), 187-203.

Basu, K., Basu, K., Cordella, T. (2016). Asymmetric punishment as an instrument of corruption control. Journal of public economic theory, 18(6), 831-856.

Lambert-Mogiliansky, A., Majumdar, M., Radner, R. (2008). Petty corruption: A game-theoretic approach. International Journal of Economic Theory, 4(2), 273-297.

Dannay, G. (2019). Information Design Against Petty Corruption (Doctoral dissertation).