Strategic Analysis of Petty Corruption: Entrepreneurs and Bureaucrats

Abstract

This paper develops a game-theoretic model of petty corruption by government officials. Such corruption is widespread, especially (but not only) in developing and transition economies. The model goes beyond the previously published studies in the way it describes the structure of bureaucratic tracks, and the information among the participants. Entrepreneurs apply, in sequence, to a track of two or more bureaucrats in a prescribed order for approval of their projects. Our first result establishes that in a one-shot situation no project ever gets approved. This result leads us to consider a repeated interaction setting. In that context we characterize in more detail the trigger-strategy equilibria that minimize the social loss due to the system of bribes, and those that maximize the expected total bribe income of the bureaucrats. The results are used to shed some light on two much advocated anti-corruption policies: the single window policy and rotation of bureaucrats. Corruption is found to be one of the most damaging consequences of poor governance characterized by lack of both transparency and accountability. Corruption lowers investment and hinders economic growth and human development, by limiting access to basic social services as well as increasing the cost of their delivery. It also increases poverty, subverts the financial system, and undermines the legitimacy of the state. Thus, corruption is anti-poor, anti-development, anti-growth, anti-investment, and inequitable. The cost of corruption to a nation is very high .