Corruption and Entry Deterrence

This paper constructs two simple asymmetric information models to analyze the effects of bureaucratic corruption on entry conditions and output in an industry. In the first model, the bureaucrat controls a direct mechanism of entry deterrence like industrial license, and can unilaterally set the bribe rate. The bribe maximization by the bureaucrat implies output restriction in the industry compared to a monopoly if there is heterogeneity of costs among the firms. In the second model, there is no explicit entry deterring mechanism available to the bureaucrat. Here we analyze the conjecture that bribe may be the outcome of collusion between the bureaucrat and the incumbents which deters entry by raising the costs of doing business. If there is cost heterogeneity, collusive entry deterring equilibrium exists under certain parameter restrictions. There does not exist a subgame perfect collusive equilibrium where bribe alone can deter entry in the case of homogenous costs.