Corruption and Bureaucratic Structure in a Developing Economy

We address the impact of corruption in a developing economy in the context of an empirically relevant hold-up problem- when a foreign firm sinks an investment to provide infrastructure services. We focus on the structure of the economy’s bureaucracy, which can be centralized or decentralized, and characterize the ‘corruptibility ’ of bureaucrats in each case. Results are explained in terms of the non-internalization, under decentralization, of the ‘bribe externality ’ and the ‘price externality. ’ In welfare terms, decentralization is favoured, relatively speaking, if the tax system is less inefficient, funding is less tight, bureaucrats are less venal, or compensation for expropriation is ungenerous