Embezzlement versus bribery

Corrupt officials can use their positions to enrich themselves in two ways. They can steal from the state budget--embezzling or misspending funds--or they can demand extra payments from citizens in return for services--bribery. In many circumstances, embezzlement is less distortionary than bribery. We analyze the tradeoff for governments in deciding how strictly to monitor and punish these two kinds of bureaucratic misbehavior. When bribery is more costly to economic development, governments may tolerate some embezzlement in order to reduce the extent of bribery--even though embezzlement is generally easier to detect. Embezzlement serves as a parallel to the "efficiency wage." This logic appears to hold in China, where misappropriation of public funds by officials appears to be ubiquitous.