1. Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe a housing inspector into approving a substandard building. If bribes cost $1,000 each, how much will a housing inspector make each year in bribes? 2. There is a provincial construction supervisor who gets to hire all of the housing inspectors. He himself is corrupt and expects his housing inspectors to share their bribes with him. Suppose that 20 inspectors work for him and that each passes along half the bribes collected from builders. How much will the construction supervisor collect each year?3. Corrupt officials may have an incentive to reduce the provision of government services to help line their own pockets. Suppose that the provincial construction supervisor decides to cut the total number of housing inspectors from 20 to 10 in order to decrease the supply of new housing permits. This decrease in the supply of permits raises the equilibrium bribe from $1,000 to $2,500. How much per year will the construction supervisor now receive if he is still getting half of all the bribes collected by the 10 inspectors?4. Will he personally be happy with the reduction in government services? 5. What if reducing the number of inspectors from 20 to 10 only increased the equilibrium bribe from $1,000 to $1,500? In this case, how much per year would the construction supervisor collect from his 10 inspectors? 6. In this case, will the construction supervisor be happy with the reduction in government services?

1) The corrupt official inspects two buildings per week, and collects two $1,000 bribes for each. A year has 52 weeks, therefore, the official will collect a total in bribes of:

52 x 2 = 104 x $1,000 = 104,000

2) If the provincial supervisor has 20 inspectors working for him, and each inspector makes the same as the one above, they will make as a whole a total of:

20 x $104,000 = $2,080,000

Because the supervisor expects half the bribes be given to him, he will earn a total of:

$2,080,000 / 2 = $1,040,000

2.2) The statement is true because corrupt officials depend on private investment to obtain their bribes. If the government provides more services, it will crowd out private investment, reducing the bribing sources.

3) Now the provincial supervisor has 10 inspectors working for him, each collecting two $2,500 bribes per week:

52 x 2 x $2,500 = $260,000 per inspector

$260,000 x 10 = $2,600,000 in total

$2,600,000 / 2 = $1,300,000

4) He will be happy because the less government services, the more opportunities for bribery.

5) He would collect $130,000 per inspector ($1,300,000 / 10)

6) He will be happy because despite the reduction in the number of inspectors, he is getting more money now because the equilibrium bribe has risen more.