Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: It is a well-established fact that the government bureaucracy in many developing countries is large, difficult to understand, non-transparent and time-consuming. However, “de jure” bureaucratic procedures sometimes have little to do with how firms or individuals actually go about when dealing with the government bureaucracy. One institution that has emerged in many countries is a specialized intermediary, henceforth called dispatcher, that assists individuals and firms in their contracts with the public sector. It is often the workings of this “de facto” institution, rather than the de jure procedure, that determines outcomes. A model where firms demand a license from the government bureaucracy is developed in order to address two sets of questions related to the use of dispatchers. First, what is the impact of dispatchers on time and resources that firms spend in obtaining licenses and what is the impact on the degree of informality, i.e. on the fraction of firms that choose to not get the license? How do these results depend on the organization of bureaucrats and dispatchers, the regulatory framework and the extent of corruption in the bureaucracy? Second, what are the incentives of corrupt bureaucrats and dispatchers to try to make regulation more/less complicated? When are the incentives of bureaucrats and dispatchers to create “red tape” aligned? Ultimately and ideally, the answers to these questions can help explain why reforms of the public sector have been so difficult.

Keywords: Dispatchers; Bureaucracy; Informality; Corruption; Red tape

JEL-codes: O10; O17

43 pages, May 14, 2009

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