June 2018

IZA DP No. 11593: Bribery, Hold-Up and Bureaucratic Structure

We analyze the provision of infrastructure by a foreign investor when the domestic bureaucracy is corrupt, but puts some weight on domestic welfare. The investor may pay a bribe in return for a higher provisional contract price. After the investment has been sunk, the bureaucracy may hold up the investor, using the threat of expropriation to demand a lower final price or another bribe. Depending on the level of care for domestic welfare, greater bureaucratic centralization may increase or decrease domestic welfare. Because of the threat of hold-up, bribery may result in greater domestic welfare than the honest benchmark does.