Uncertainty, Entrepreneurship and the Organisation of Corruption

We develop a model of occupational choice in which private agents have the option of either working in some costless, but low-yielding, activity (subsistence production), or undertaking a costly, but poten-tially more rewarding, venture (entrepreneurship). In the case of the latter, loans must be acquired from \u85nancial intermediaries and li-censes must be obtained from public o ¢ cials. Associated with these tasks are two potential sources of imperfection- an imperfection in nancial markets due to asymmetric information and an imperfection in governance due to rent-seeking. Rent-seeking is risky because of a random probability that it will be detected and punished. Against this background, we show how corruption has di¤erent e¤ects depending on the way that it is practised: in the case of disorganised corruption, bribe payments are uncertain and capital market imperfections are allowed to surface; in the case of organised corruption, both of these features are removed. The implication is that, in terms of deterring entrepreneurial activity, organised corruption may be the lesser of the two evils, even if bribe demands are higher in this case. This result may be used to explain the puzzle of why corruption appears to be much less damaging in some countries than in others