Corruption and Hold-Up: The Role of Intermediaries

Ajit Mishra, Andrew Samuel

Research output: Working paper

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Abstract

Corrupt contracts are illegal and, therefore, vulnerable to hold-up. That is, a bureaucrat who has accepted a bribe from a firm in exchange for a license may still choose not to grant the firm that license (hold-up). This paper develops a model to study the role that intermediaries play in preventing hold-up. There are two types of firms, good firms that are legally entitled to receive a license, and harmful firms that are not. Without intermediaries only good firms enter the market, and harmful firms do not enter because of hold-up. Intermediaries are legally permitted to help firms reduce their navigation costs of obtaining licenses. Thus, intermediaries increase entry of good firms. However, by utilizing the legalaspects of their transaction with good firms as leverage against the bureaucrat, intermediaries can prevent hold-up among harmful firms. Thus, intermediaries increase participation by both good and harmful firms and their welfare costs are ambiguous. Data obtained from occurrences of violations of the Foreign Corrupt Practices Act are broadly consistent with our model.
Original languageEnglish
Place of PublicationBath, U. K.
PublisherDepartment of Economics, University of Bath
Publication statusPublished - 7 Aug 2013

Publication series

NameBath Economics Research Working Papers
No.12/13

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  • Cite this

    Mishra, A., & Samuel, A. (2013). Corruption and Hold-Up: The Role of Intermediaries. (Bath Economics Research Working Papers; No. 12/13). Department of Economics, University of Bath.