Bribes or connections? What form of corruption “greases the wheels” of the economy?

Abstract

In this article, we use the theoretical division between market and network corruption and offer their empirical dimension. At its extreme, market corruption involves a free market for corrupt services, where anyone who pays a bribe gets access to an informal service. Network corruption provides access to corrupt services to a limited pool of individuals who are members of the circle of acquaintances of officials. Using cross-country data from the World Bank and the World Economic Forum, we answer the question of which form of corruption does more harm to the economy: (a) market corruption associated with an additional financial burden on business and uncertainty, but not violating the principles of competition, or (b) network corruption, which does not burden businesses with additional payments, but limits competition. As a result of econometric analysis, we come to the conclusion that network corruption “clogs the wheels of the economy” to a greater extent than market one.