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A Search-Theoretic Model of Bureaucracy and Corruption

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  • Shouyong Shi
  • Ted Temzelides

Abstract

We analyze bureaucracy and corruption in a market with decentralized exchange and lemons. Exchange is modelled as a sequence of bilateral, random matches. Agents have private information about the quality of goods they produce and can supplement trade with socially inefficient bribes. Bureaucracy is modelled as a group of agents similar to private agents, but who enjoy centralized production and consumption. Transaction patterns between the bureaucracy and the private sector are fully endogenous. Our main finding is that centralized production and consumption in the bureaucracy also gives rise to low power incentives for the individual bureaucrats. As a result, we find conditions under which private agents bribe bureaucrats, while they do not bribe each other. An equilibrium with corruption and an equilibrium without corruption can co-exist. We discuss some welfare implications of the model.

Suggested Citation

  • Shouyong Shi & Ted Temzelides, 2003. "A Search-Theoretic Model of Bureaucracy and Corruption," Working Papers shouyong-03-02, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:shouyong-03-02
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    References listed on IDEAS

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    5. Thierry Verdier & Daron Acemoglu, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March.
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    More about this item

    Keywords

    Bureaucracy; Corruption; Search; Private Information.;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H00 - Public Economics - - General - - - General

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