Corruption and decisions on opening up markets

We consider a mixed duopoly with a private firm, domestic or foreign-owned, competing with a public firm. We analyze the extent to which opening policy is affected by lobbying efforts and rent-seeking behaviors. We obtain the counterintuitive result that corruption may improve social welfare when the government neglects corruption and does not prevent it, as the scope for the entry of a foreign private firm is greater. Moreover, the government may prevent corrupt activities by policy-makers by requiring the entrant firm to buy a license to operate in the market. In this case, the scope for external opening up is greater than in the other cases and social welfare is further improved when the entrant firm is foreign-owned.