When does corruption cause red tape? Bribe discrimination under asymmetric information

Under what circumstances does corruption cause inefficiencies, and when are bribes merely transfers? I propose a modified monopoly price discrimination model that shows under what circumstances corruption leads to an inefficiently high administrative burden in government-firm interactions. The model highlights the importance of the information the bureaucrat has regarding the firms’ willingness to pay (WTP) to avoid administrative burden and the bureaucrat’s decision to gather this information. The government-firm interaction will have a Pareto efficient level of administrative burden with perfect price (i.e., bribe) discrimination if the bureaucrat decides to investigate the firm and learn its WTP. If the cost of investigation is too high, the government official instead uses red tape to extract more bribes from firms with higher WTP, causing inefficiently high levels of administrative burden. I show that the model’s predictions are consistent with data from 186,277 government-firm interactions from 18 years of the Enterprise Survey covering 158 countries. I find that corruption leads to increased administrative burden when government officials have less information about the firm’s WTP and that the effect is larger for firms with a low WTP. This has several policy implications for how to reduce administrative burden and where to focus anti-corruption efforts.