Effects and (In)tractability of Decentralized Corruption

Corruption is defined in an occupational choice model as extra fees that must be paid by some entrepreneurs. Higher corruption leads to lower wages and total output. Income inequality follows a Kuznets relationship with both corruption and income. Two types of decentralization of the bribe-setters are distinguished, regional and bureaucratic. When mobility is imperfect, bureaucratic decentralization increases, and regional decentralization decreases, corruption. Sufficient bureaucratic decentralization results in such high corruption that entrepreneurship is suppressed and incomes are low. Decentralization determines the effectiveness of two anti-corruption mechanisms, electoral accountability and efficiency wages. Greater bureaucratic decentralization makes both more ineffective due to the negative externalities across bribe-setters that it creates. In the limit, neither mechanism can make a dent in corruption. In contrast, regional decentralization makes both mechanisms more effective. Thus, a sort of increasing returns is present: bureaucratic decentralization is more inherently corrupt and more resistant to anti-corruption mechanisms, while regional decentralization is less inherently corrupt and more tractable.