The choice between market failures and corruption

Because government intervention transfers resources from one party to anoth er, it creates room for corruption. As corruption often undermines the purp ose of the intervention, governments Mill try to prevent it. They may creat e rents for bureaucrats, induce a misallocation of resources, and increase the size of the bureaucracy. Since preventing all corruption is excessively costly, second-best intervention may involve a certain fraction of bureauc rats accepting bribes. When corruption is harder to prevent, there may be b oth more bureaucrats and higher public-sector wages. Also, the optimal degr ee of government intervention may be nonmonotonic in the level of income. ( JEL D23, H40).