The public sector is an influential partner of the market economy in many developing countries. In the absence of government’s intervention, economic functioning of these countries could turn into constant disequilibrium without any hope of growth and economic prosperity. On the other hand unlimited government intervention could harm the economic growth by unnatural expansion of public sector and ensuing public corruption. It is known that government has discretionary power in providing public goods and regulating the economy. Corrupt bureacrats with this discretionary power creates and extracts rents by manipulating the public good supply and regulations: I) by attaching excessive red tape to the public good they are providing; II) or by making the regulations difficult for the private agents to comply with. The former type of corruption results in less public input being provided at higher cost to the private agents. The latter increases noncompliance, and results in bribery. Consequently, the overall public sector burden is higher in the environment with corrupt bureaucracy. We show this outcome using a simple theoretical model, and then confront it with empirical evidence.
JEL classification: D73, H23, H32, H41, O17, O38, K23