Corruption, bribery, and market reform

This paper revisits the relationship between rent-seeking and market reform. We consider a scenario where less efficient domestic and more efficient foreign firms are engaged in Cournot competition bribery. The local firm pays for imposing a cost on the foreign firms; the foreign firms pay so that the local competitor does not obtain an overwhelming advantage. With corrupt politicians, free trade will only be adopted if it maximizes the value of the bribes they receive. A positive relationship between free-trade reform and corruption can occur when foreign firms face little competition or if they are not sufficiently efficient compared to domestic firms. On the other hand, when foreign firms operate in a competitive environment, radical free trade reduces the supply of bribes to politicians, which is precisely why such trade is not adopted. If the number of foreign firms is limited, both drastic reform and corruption are facilitated. With competition from a large number of foreign firms and the existence of a relatively efficient local firm, no reform is implemented, and the level of corruption remains unchanged.