Prohibition versus Taxation in Corrupt Environments

Desiree Desierto and John Nye

Journal of Institutional and Theoretical Economics (JITE), 2017, vol. 173, issue 2, 239-252

Abstract: If corruption is rife and tolerated by society, prohibiting the production of a good with negative social costs may be more efficient at limiting quantity than legalizing and taxing producers. It becomes incentive-compatible for a corrupt government to enforce prohibition and credibly limit supply in order to extract bribes from illegal producers. In equilibrium, total quantity is low. In contrast, when the good is legal and taxed, a corrupt government can extract rents only by expropriating the tax revenues. Thus, it prefers a larger market in order to generate more taxes, and quantity is higher.

JEL-codes: D21 D23 H41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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DOI: 10.1628/093245616X14618208477808

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