Abstract

This paper examines the implications of administrative unit proliferation on rent-seeking and social welfare in a two-stage group contest setup. A central planner decides whether to reorganize administrative units by increasing their number and announces a development scheme with funds of size $S$. The administrative units then compete with each other for a higher share of the fund in the first stage of the contest. After that, in the second stage of the contest, the economic agents within each administrative unit compete for the share of the fund that their unit received in the previous stage. Results demonstrate that for general population distributions, the central planner always has the incentive to reorganize administrative units as rent generated in the first stage after reorganization is always higher than that before reorganization. However, rent generated in the second stage as well as the social welfare depends on how symmetric the population distribution is both before and after reorganization. In particular, if the population distribution is symmetric both before and after reorganization, or symmetric before reorganization and asymmetric after reorganization, then second-stage rent is lower after reorganization, whereas social welfare increases after reorganization. However, if the population distribution is asymmetric before reorganization and symmetric after reorganization, then for a sufficiently low increase in the number of administrative units, second-stage rent is higher after reorganization whereas social welfare declines after reorganization.

Abstract

This paper compares the effects of grand corruption versus petty corruption on economic surplus, environmental damage, and social welfare in the context of natural resource extraction. The extraction of natural resources by a profit-maximizing monopoly is modeled using a multi-stage game. There are three alternative scenarios. In the first scenario, the social planner is corruptible and the monopolist can bribe the social planner to influence the quota policy for extraction in his favor (Grand Corruption). In the second scenario, the social planner is honest but the monopolist can bribe local inspectors to overlook illegal extraction (Petty Corruption). In the third scenario, both the social planner and local inspectors are corruptible (Grand and Petty Corruption). Results demonstrate that when petty corruption-induced loss in the monopolist's revenue per unit of extraction is greater (lower) than grand corruption-induced distorted valuation of net marginal environmental damage, grand corruption leads to higher (lower) environmental damage, higher (lower) economic surplus, and lower (higher) social welfare compared to that under petty corruption. Moreover, if the above condition holds, then compared to only grand (petty) corruption, the presence of both grand and petty corruption leads to higher environmental damage, higher economic surplus, and lower social welfare.