14th journées Louis-André Gérard-Varet

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Static Endogenous Corruption
Hana Yousefi, Gareth D. Myles

Last modified: 2015-05-11


There are significant empirical studies analysing the impact of public sector corruption on macroeconomic indicators. In contrast, there are few theoretical explorations of the endogenous emergence of corruption. The purpose of the paper is to contribute to the literature by exploring a model in which the level of corruption is endogenous. Workers can choose private or public employment. Public employees can either be honest or corrupt. The payoff to a worker is a function of the wage level, the efforts required in work, and the level of bribes received if corrupt. Corruption leads to a loss of self-esteem, so the set of corrupt public employees is determined by the individual-specific value placed on self-esteem. The analysis determines the equilibrium in employment allocation across the private and public sectors, and the division between honest and corrupt. This endogenizes the level of corruption. Bribes are paid by a representative firm as a reward for being charged a reduced rate of tax, with the division of gains determined by Nash bargaining. As the tax rate increases the proportion of corrupt relative to honest in the public sector increases and the bribe received by each corrupt officials also increases. In contrast, a higher social sanction leads to a lower number of corrupt officials in the public sector.


Endogenous corruption, tax rate, Bargain, bribe