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Corruption and Competition in the Presence of Inequality and Market Imperfections

Indranil Dutta and Ajit Mishra

No 123, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: We analyze the relation between corruption, competition and inequality in a developing economy context where markets are imperfect and there is wealth inequality. We consider an economy where different types of households (efficient and inefficient) choose whether to enter the production sector or not. Due to information asymmetry and wealth inequality, the market fails to screen out the inefficient types. In addition to the imperfect screening in the credit market, the inefficient type's entry is further facilitated by corruption in the product market. We analyze the market equilibrium and look at some of the implications. We show that a rise in inequality can lead to an increase in corruption along with greater competition. By endogenising the types, we also show how in the presence of corruption, initial wealth inequality will distort the incentives of the poor and lead to trap-like situations.

Keywords: Corruption; Competition; Credit Market; Inequality; Screening. (search for similar items in EconPapers)
JEL-codes: D60 I20 R20 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2004-03
New Economics Papers: this item is included in nep-cwa, nep-dev, nep-geo and nep-ltv
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Working Paper: Corruption and Competition in the Presence of Inequality and Market Imperfections (2003) Downloads
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