Red Tape, Corruption and three-tier hierarchy

[D4]

how can chandler come here and get away with anything he likes. its just utter red tape

First, the bureaurcrat may extort bribes from the agent in exchange

for reducing the amount of red tape.

Second, the bureaucrat may take bribes to

conceal the information produced through red tape.

Even though the former kind of corruption tends to reduce red tape, we show that the equilibrium level of red tape is above the social optimum.

Red tape helps to sort out the agents who do not deserve the resource (chandler)

However, since administering red tape requires specific skills, the administrator has to hire a self-interested bureaucrat and deal with the ex ante and ex post corruption. Ex post corruption destroys all the benefits of red tape (the information produced through red tape is wasted), while all the costs are present.

Hence, the admintrator has to prevent the collusion ex post by paying the bureaucrat more for rejecting a socially undesirable applicant than 2 the applicant’s private willingness to pay. This payment can easily exceed the social value of rejecting the undesirable applicant. In this case, too much red tape is produced.

The bureaucrat can end up with too much incentive to employ red tape but never too little. Indeed, if the private valuation (and therefore potential bribe) is below the social value of rejecting the applicant, then the collusion-proofness constraint is not binding and the social optimum is implemented.

1. If there is ex ante corruption but no threat of ex post corruption then P implements the social optimum via the following mechanism: P sets σ(ρ) = ρ, ∆g = max{vg, θb−θg1−π } and ∆b = |vb|. Then B chooses r = r∗ and β = θg − r∗.

2. If ex post corruption is allowed but there is no ex ante corruption, then P cannot

implement the social optimum. The equilibrium is as follows:

(a) If Rg < r0, P sets σ(ρ) = ρ, ∆b ≥ θb, and ∆g sufficiently high. The equilibrium

level of red tape is Rg > r∗. Welfare is W0 + π|vb|I (Rg) − Rg.

(B) If Rg ≥ r0, P sets σ(ρ) ≡ 1, ∆b = ∆s = 0. The equilibrium level of red tape is

r = 0. Welfare is W0.

3. If neither ex post nor ex ante corruption are allowed then P implements the social optimum through a flat contract ∆b = 0, and sufficiently high ∆s.

12The fact that B is indifferent between r∗ and other levels of red tape in equilibrium is an artefact of the trivial cost of red tape to the bureaucrat. If the red tape imposed a positive (even infinitesimal) cost on B, the socially optimal level r∗ would be B’s unique choice: P would set ∆b such that B’s private marginal

cost of red tape would be equal to his private marginal benefit ∆bπI0(r∗).

i think we can all agree that this is the case.

[Steven]

It certainly raises some interesting ideas not least of which is the cultural and regional aspects to corruption and red tape. However it would seem that there is no analysis (except by way of talking about the value of either side of the transaction action equation) of the supply of Bureaucrats and how that could affect the value proposition. B)

Some explanation of some of the symbols in the equations would be good.