Edited by Francesco Forte, Ram Mudambi and Pietro Maria Navarra
Chapter 20: The norm of profits extraction from corruption by bureaucracy and market size
Bureaucracy norms can be represented by the preferences of bureaucrats (civil servants, government officials) who make or strongly affect economic policy or economic transactions. For example, such norms can be represented by the weights assigned to the public well-being relative to more selfish interests, represented by the probability of remaining in office or by the amount of resources transferred from the consumers or producers to the bureaucrats (Epstein and Nitzan 2007; Esteban and Ray 2011; Grossman and Helpman 1994; van Winden 1998). An alternative representation of the prevailing norm can be based on the revealed preference of the economic agents (government officials, producers and consumers), namely on their behavior as manifested in their interaction. For example, such a norm can be represented by the costs of interaction with government officials - the costs of consumers or producers who engage in economic activity that requires formal or informal endorsement by government officials. In many countries, and in particular, developing countries, low-level officials reduce the profit of firms by delaying different aspects of their operation (producing and selling their products). The firms transfer part of their profits, for instance, when paying 'speed money' to enhance their business activities and avoid bureaucratic friction or red tape (Kahana and Nitzan 2002; Lui 1985; Muhkerjee 2005). In the current study the second representation of a bureaucracy norm or normative corruption is adopted. Specifically, we assume that such a norm allows the use of a government office for extracting resources (Konrad 2009).
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