Journal article
Corruption and socially optimal entry
Journal of public economics, Vol.123, pp.30-41
03/01/2015
DOI: 10.1016/j.jpubeco.2014.12.012
Abstract
The paper investigates the effects of corruption in the entry-certifying process on market structure and social welfare for a Cournot industry with linear demand and costs. To gain entry, a firm must pay a bribe-maximizing official a fixed percentage of anticipated profit, in addition to the usual set-up cost. This would lead to a monopoly, but only in markets without pre-existing or shadow-economy firms. A benevolent social planner may preempt the harmful effects of corruption by either manipulating the number of pre-existing firms in the market, or by setting up two independent (corrupt) licensing authorities. A socially optimal number of firms in the market may be reached by choosing the right number of pre-existing firms or by having exactly two licensing authorities. These mechanisms may be seen as restoring second-best efficiency in settings characterized by two major sources of distortion: Imperfect competition and corruption. We also show in an extension that the basic insights carry over in a qualitative sense to a model with quadratic costs and first best entry regulation.
•Free entry under imperfect competition and corrupt entry-certifying officials are two distortions to social efficiency.•Pre-existing firms (including those in the shadow-economy) mitigate the distortion due to corruption.•Competition between two corrupt officials restores second-best social efficiency: The two distortions exactly cancel out.•The conclusions extend in a qualitative sense to the comparison between free entry and first best regulated entry.
Details
- Title: Subtitle
- Corruption and socially optimal entry
- Creators
- Rabah Amir - University of IowaChrystie Burr - University of Colorado Boulder
- Resource Type
- Journal article
- Publication Details
- Journal of public economics, Vol.123, pp.30-41
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jpubeco.2014.12.012
- ISSN
- 0047-2727
- eISSN
- 1879-2316
- Language
- English
- Date published
- 03/01/2015
- Academic Unit
- Economics
- Record Identifier
- 9984380546402771
Metrics
2 Record Views