On the Relation Between Corruption and Market Competition

We construct a model where bureaucrats are corruptible, in the sense that they may accept bribes in order to mislead the authorities on the actual circumstances of firms that do not comply with a government regulation. We show that corruption increases the number of competing firms. We also show that increased competition (i) increases the likelihood that corruptible bureaucrats will actually transgress, and (ii) increases the bribe that corrupt bureaucrats will demand from each firm. These results are consistent with existing evidence showing a positive relation between competition and corruption, and that this causal relation operates in both directions.