Red tape and corruption

We study the emergence and interaction of red tape and corruption in a principal-bureaucrat-agent hierarchy. The principal is to provide the agent with a unit of a good that involves externalities so that market mechanisms fail to achieve first best. Red tape produces information but is costly to the agent and is administered by a corrupt bureaucrat. First, the bureaucrat may extort bribes from the agent in exchange for reducing the amount of red tape. Second, the bureaucrat may take bribes to conceal the information produced through red tape. Even though the former kind of corruption tends to reduce red tape, we show that the equilibrium level of red tape is above the social optimum. (C) 2003 Published by Elsevier B.V.