CORRUPTION AND ALLOCATION EFFICIENCY

In this paper, we investigate the possibility of allocation inefficiencies associated with corrupt practices. Specifically, we consider the case in which two firms compete via bribery of a corrupt government official for a to-be-awarded project. The economy may suffer allocation inefficiencies whenever there is some degree of discrimination. Given additional assumptions, it is shown that the possibility of inefficient allocations increases as the degree of discrimination increases. Although empirical verification of discrimination is difficult (due to the observational equivalence of an alternative imperfect knowledge model), two possible explanations for the determination of discrimination coefficients indicate that it is a general phenomenon in competitive bribery games. © 1990.