Uncertainty, entrepreneurship, and the organization of corruption

This paper studies an occupational choice in which risk-neutral private agents have the option of either working in costless but low-yielding activity or undertaking a costly but potentially more rewarding venture, namely, entrepreneurship. Loans must be acquired from financial intermediaries, and licences must be obtained from public officials for entrepreneurship. This paper has integrated two new ingredients into the traditional occupational choice framework: financial market imperfection due to asymmetric information between entrepreneurs and financial intermediaries, and public-sector imperfection due to rent-seeking induced uncertainty on bribe demand. The paper shows how corruption has different effects depending on how it is practised. Under disorganized corruption, bribe payments are uncertain, and capital market imperfections surface; under organized corruption, these features are removed. This implies that organized corruption is likely to be the lesser of the two evils in terms of deterring entrepreneurial activity, even if bribe demands are higher in this case.