Abstract
This paper examines whether corruption can be an efficiency enhancing adaptation to poor institutional environments. Prior research on this question has not taken into account the heterogeneity of corruption or the possibility that petty bureaucratic corruption in the form of bribery may grease the wheels of an economy at the same time that grand political corruption such as diversion of state funds may sand the wheels of economic growth. By differentiating between grand and petty corruption and narrowly framing poor institutional quality as the burden of regulation on economic activity, I am able to show that bribery is not an efficiency enhancing adaptation to poor regulatory environments. To the contrary, given the specific type of corruption and institutional environment most conducive to an efficiency enhancing effect, the opposite effect was found.
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