Does Competition Kill Corruption?

TLDR

Corruption involves officials or gangsters extracting money from firms and can influence the number of firms in a free‑entry equilibrium, yet increased competition does not necessarily reduce corruption. The model shows that a rational corrupt agent may eliminate his bribe source by forcing a firm to exit. The study finds that corruption‑induced firm exit does not automatically improve social welfare.

Abstract

Corrupt agents (officials or gangsters) exact money from firms. Corruption affects the number of firms in a free‐entry equilibrium. The degree of deep competition in the economy increases with lower overhead costs relative to profits and with a tendency toward similar cost structures. Increases in competition may not lower corruption. The model explains why a rational corrupt agent may extinguish the source of his bribe income by causing a firm to exit. Assessing the welfare effect of corruption is complicated by the fact that exit caused by corruption does not necessarily reduce social welfare.