Quota Regulation under Corruption – Grand, Petty and the Cut-Money Culture

This paper examines the implications of different forms of corruption, i.e., grand corruption, petty corruption, and cut-money culture, on the formulation and enforcement of regulatory policies. Focusing on quota regulation in the context of natural resource extraction, it demonstrates the following. In the absence of cut-money culture, petty corruption never occurs in equilibrium, irrespective of whether the policymaker is honest or corrupt. However, when the policymaker is corrupt, the threat of petty corruption leaves no room for grand corruption unless net environmental damage due to extraction is sufficiently discounted, in which case grand corruption occurs. In contrast, the presence of cut-money culture induces corruption, either petty or both grand and petty, in equilibrium. Cut-money culture may reduce the equilibrium quota from the ‘no petty corruption enforcing quota’; however, whenever this occurs, total extraction and environmental damage rise, and welfare declines. Our results have important implications for designing corruption control mechanisms and governing natural resource extraction.