ABSTRACT
Corruption involves the malfunctioning of some areas of the public sector. This chapter discusses the causes of corruption and government malfunctioning. Corruption commonly entails the providing of a service by a public servant or politician in exchange for a bribe. Given circumstances of cumbersome regulation, excessive bureaucracy or market restrictions some economists tended to emphasize the positive effects of corruption. An approach where the creation of rules is considered to be the actual goal of the analysis is provided by principal-agent theory. A self-serving principal may create an environment where laws do not prohibit his own self-enrichment or that of a ruling class. The most crucial problem with a strong self-serving principal is that he will not be able to credibly commit himself to policies. Such credibility issues have been dealt with in New Institutional Economics. This analysis was fruitfully applied to the operation of political institutions and the political economy of dictatorship.
