Uncertainty, entrepreneurship, and the organization of corruption
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Uncertainty, entrepreneurship, and the organization of corruption Yuan Wang
Accepted: 4 August 2020 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper studies an occupational choice in which risk-neutral private agents have the option of either working in costless but low-yielding activity or undertaking a costly but potentially more rewarding venture, namely, entrepreneurship. Loans must be acquired from financial intermediaries, and licences must be obtained from public officials for entrepreneurship. This paper has integrated two new ingredients into the traditional occupational choice framework: financial market imperfection due to asymmetric information between entrepreneurs and financial intermediaries, and public-sector imperfection due to rent-seeking induced uncertainty on bribe demand. The paper shows how corruption has different effects depending on how it is practised. Under disorganized corruption, bribe payments are uncertain, and capital market imperfections surface; under organized corruption, these features are removed. This implies that organized corruption is likely to be the lesser of the two evils in terms of deterring entrepreneurial activity, even if bribe demands are higher in this case. Keywords Corruption regimes . Bureaucratic corruption–induced uncertainty . Productive entrepreneurial activity . Financial market imperfection JEL classifications D73 . D80 . L26 . G10 . O16 Y. Wang (*) Sheffield Business School, Sheffield Hallam University, Howard Street, Sheffield S1 1WB, UK e-mail: [email protected]
1 Introduction Corruption defined as the abuse of power by public officials for personal gain (e.g. Aidt 2003; Jain 2001; Treisman 2000) is widely acknowledged as one of the most threatening, resilient, and pervasive obstacles to economic growth and social development.1 The most deprived countries of the world are often the most corrupt for long periods. This is seen as being more than just a coincidence, and it evokes alarm that such countries have become trapped in a vicious circle of widespread poverty and wholesale misgovernance. A considerable amount of evidence exists to support the above concerns, with numerous empirical studies identifying significant adverse effects of corruption on growth (e.g. Ades and Di Tella 1997; Johnson et al. 2011; Mauro 1995; Mo 2001; Swaleheen 2011), and numerous others indicating the reverse causality from growth to corruption (e.g. Holcombe and Boudreaux 2015; Treisman 2000). There is also a fair amount of theoretical work which seeks to explain this evidence, together with addressing various other issues relating to the macroeconomics of misgovernance (e.g. Acemoglu and Verdier 1998, 1 I use this definition as the paper focuses on public sector corruption. In particular, I intend to model the malfeasance of bureaucrats, which is the petty corruption (or bureaucratic corruption) but not grand corruption (or political corruption). If no bureaucrat distributes rents in the first place, there will be no corruption.
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