Corruption and socially optimal entry

Rabah Amir () and Chrystie Burr

Journal of Public Economics, 2015, vol. 123, issue C, 30-41

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.

Keywords: Industrial organization of corruption; Free entry; Second best entry; First best entry; Corruption and market outcomes; Corruption and imperfect competition (search for similar items in EconPapers)
JEL-codes: D43 D60 H10 H82 L20 L50 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:123:y:2015:i:c:p:30-41

DOI: 10.1016/j.jpubeco.2014.12.012

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