Collusion, extortion and the government's organizational structure

This paper studies the government's organizational structure with petty corruption. We investigate whether the government should centralize or separate the power of granting business permits if bureaucrats may engage in collusion or/and extortion. Centralization dominates when the bureaucrats engage in extortion only, while separation dominates when the bureaucrats can collude with unqualified firms. Our analysis thus sheds some light on the debate over the “single window” policy, a proposed governmental reform for curbing corruption. We also find that, given multiple bureaucrats, fragmenting the bureaucrats’ responsibility in checking firms’ production eligibility can be welfare decreasing.