Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium Member Libraries http://www.archive.org/details/theoryofmisgoverOObane 1> working paper department economics of A THEORYOFMISGOVERNANCE AbhijitV. Banerjee No. 97-4 February, 1997 massachusetts institute of technology 50 memorial drive Cambridge, mass. 02139 WORKING PAPER DEPARTMENT OF ECONOMICS A THEORYOFMISGOVERNANCE AbhijitV.Banerjee No. 97-4 February, 1997 MASSACHUSEHS OF INSTITUTE TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE. MASS. 021329 MASSACHUSETTSINSTITUTE PCTF.r.MNni.oGY 11987 'aUL- A THEORY OF MISGOVERNANCE ABHIJIT V. BANERJEE 28th February 1997 *This paper was inspired by many conversations with Andrei Shleifer. Two anonymous referees made extremely helpful comments I have also profited from . comments by Daron Acemoglu, Andres Almazan, Tuli Banerjee, Gary Becker, Douglas Bernheim, ,,Christopher Clague, Peter Diamond, Avinash Dixit, Drew Fudenberg, Oliver Hart, Patrick Legros Eric Maskin, Andrew Newman, Thomas , Piketty, Rohini Somanathan, Jean Tirole, Jorgen Weibull and seminar participants at Princeton University, the University of British Columbia, the Kennedy School of Government at Harvard University, the University of Chicago and Harvard University. Some of these arguments were in the notes that were circulated some time ago as "The Costs and Benefits of Corruption.". This work was carried out when the author was an IPR junior fellow. It was supported by financial assistance from IRIS. However, the views expressed here are strictly the authors own. The author also acknowledges the hospitality of DELTA in Paris where this work was started. Abstract. This paper tries to explain why government bureaucracies are often associated with red tape, corruption and lack of incentives. The paper identifies two specific ingredients which together can provide an explantion - the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government. We show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people. We also argue that we need to posit the existence of a welfare-oriented constituency within the government in order to explain red tape and corruption. JEL Classification D23, H40