Optimal antibribery policy when bribery type is endogenous

Abstract

AbstractThis paper analyzes the optimal allocation of antibribery resources when bribery type is endogenously determined by corrupt bureaucrats. A firm is supposed to invest to get licenses for production from bureaucrats. The bureaucrat commits to a bribes schedule that specifies bribes demanded from compliant firms (therefore, engaging in extortion) and noncompliant firms (engaging in collusion) as a precondition of granting the license. The allocation of antibribery resources determines the probability that each type of bribery is detected and prosecuted and thus affects the bureaucrat's choice of bribes schedule and the equilibrium bribery type. We find that the government should prioritize combating collusion when the resources are sufficiently scarce, should abstain from combating extortion after it wipes out collusion when the resources are less scarce, and should eradicate both types of bribery when the resources are sufficiently abundant. When there are multiple investment dimensions, however, there exists a special case where the government targets both types of bribery when the resources are at some intermediate level.