We analyze bureaucracy and corruption in a market with decentralized exchange and lemons.
Exchange is modeled as a sequence of bilateral, random matches.
Agents have private information about the quality of goods they produce and can supplement trade with socially inefficient bribes. Bureaucracy is modeled as a group of agents similar to private agents, but who enjoy centralized production and consumption. Our bureaucracy has no control or advantage over the private sector in the production, distribution, or monitoring of the goods, and private agents do not have to trade with the bureaucrats. We characterize the endogenous exchange patterns. We find conditions under which private agents bribe bureaucrats, while they do not bribe each other.