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The formal rules governing the extraction of revenue, enforcement of contracts, etc.
This view of the state is nested in the neoclassical political economy’s approach to the state as a self-interested actor (Bardhan, 1990 and Olson, 1990) that enforces property rights and contracts (North, 1990) but can take advantage of its monopoly power to engage in predatory behavior designed to extract revenue (Levi, 1988) or otherwise acquire rents (Srinivasan, 1985) from the population.
See Tanzi (1998) for a description of areas where opportunity for corruption may arise as a result of excessive government regulation and discretion in the provision of goods and services in the economy.
Dabla-Norris and Freeman (1999) develop a model of the interconnectedness of underdevelopment and corruption, in which pervasive corruption discourages market activity, thereby, reducing the incentives to allocate resources for controlling corruption.
The term government hierarchy and the state will be used interchangeably in this paper.
For instance, the provision of public goods, such as licenses, permits, and import quotas to producers; collection of duties on legal imports by customs inspectors; the settlement of disputes between private agents, etc.
This is akin to Shliefer and Vishny’s (1993) notion of “public rent-seeking”, which they define as a redistribution from the private sector to government bureaucrats who can influence private economic activity.
This result is akin to Olson’s (1993) idea that a self-interested ruler with an “encompassing” interest in the domain over which his coercive power is exercised can be lead to act in ways that are consistent with those subject to that power.
In a cross-country regression van Rijckeghem and Weder (1997) find that countries with poorly paid public officials tend toward greater corruption.
See Wade (1982) for a description of sale of offices associated with the rights to allocate irrigation water in southern India.
In her study of revenue production in Republican Rome, Margaret Levi (1988) notes that high measurement, monitoring, and delegation costs were responsible for the rise of tax farming as a means of securing revenue for the state.
In this context, strategic complementarity refers to the increasing profitability of engaging in corrupt acts when all others are acting in the same way. For example, an increase in the number of corrupt agents may raise the cost of an effective audit as in Lui (1986), thereby, reducing the chance that each will be caught or the severity of punishment upon detection may decline as more officials are corrupt, thus, increasing the payoff from engaging in corruption.
If we interpret economic activity to denote aggregate investment in the economy, then x can be regarded as the aggregate of investment decisions. Alternatively, x can be regarded as the aggregate decision whether or not to engage in productive market activity.
Note that this assumption is satisfied by expected utility maximization.
We are assuming that the dictator can precommit to a preannounced tax rate. The failure of a dictator who exercises sovereign power to irrevocably commit himself to a preannounced tax rate has been discussed elsewhere in the literature. See, for example, Grossman and Noh (1990).
As in Banerjee (1997) and Acemoglu and Verdier (1996), corruption can be thought of as deterring ex ante incentives to invest because ex post individuals do not reap the full benefits of such investment. This assumption is consistent with recent empirical findings on the links between bureaucratic corruption and investment. For instance, both, Mauro (1995) and Keefer and Knack (1995) find that bureaucratic corruption is negatively correlated with private investment and growth.
This assumption does not restrict the ability of our model to explain how corruption propagates in the government hierarchy. We capture the recursive property of corruption by assuming that the dictator can extract rents from those below him in the hierarchy by setting w < 0.
Although the dictator can, in principle, select any wage rate above
Note that there are only pure strategy equilibria in this game.
We can interpret e as the effort by the dictator to install legal infrastructure or auditing procedures in the hierarchy to deter lower level corruption.
In general, a dictator’s proclivity for regulating tax farming is likely to be related to his security of tenure. A government run by a succession of self-interested central authorities, with the short horizons inevitable given their insecurity of tenure, would have a greater propensity to engage in tax farming than a more stable government.
The class of games that satisfy this property are called “supermodular” games. For an analysis of supermodular games see Topkis (1979). See also Milgrom and Roberts (1990) for other economic applications of games that exhibit super modularity.
The term “strategic complements” was introduced by Bulow, Geanakoplos, and Klemperer (1985) to refer to games in which the best response functions of the players are upward sloping
In differential terms, this assumption is equivalent to requiring that utility functions be continuously differentiable, with the partial derivative ∂Vi/∂ĉ > 0.
In general, we can characterize this condition in differential terms for the case of smooth utility functions with Euclidean domains, by requiring that utility functions be twice continuously differentiable with the cross partial derivative ∂2V/∂ci∂ĉ ≥ 0. This condition implies that an increase in the level of corruption of all deputies j, increases the marginal return to corruption for deputy i.
A sufficient condition for multiple equilibria in this environment is that λ > 1.
Note that this is a necessary as well as sufficient condition because the deputy’s utility function is assumed to be linear. For more general utility functions, additional restrictions may be required for increases in ĉ to induce increases in ci.
Note that the strategic complementarity in the above example depends on the implicit assumption that corrupt deputies do not crowd each other by competing for the proceeds from private sector activity. In reality, the return from corruption may actually fall if a higher level of corruption in the hierarchy implies a lower return per corrupt deputy. In the example above, we avoid this property of crowding by assuming that each deputy interacts with a single producer or investor.