Intermediated Corruption

This paper uses a search theoretic framework with reputation building to consider the role that intermediaries play in corruption. Overall, intermediation in corruption acts as an income redistribution mechanism that transfers value from bureaucrats and entrepreneurs to intermediaries. Intermediaries with higher reputations earn higher premiums. Increasing the average wage reduces participation in corrupt activities. As the government increases the fraction of profits that it legally extracts from entrepreneurs in the form of compliance and/or red tape costs, intermediation intensifies as entrepreneurs are reluctant to obtain licenses through legal means. As a result corruption becomes endemic, particularly under regimes where business costs are high, and measures to combat corruption are ineffective as they merely transfer value to intermediaries. A calibration of the model to Mexican data confirms that increasing the frequency with which the governments audits bureaucrat entrepreneur matches reduces welfare, and increases the equilibrium price entrepreneurs pay to obtain permits