social and political in‡uence on a household in a developing country, and the rich can in‡ict substantial social and economic costs on a teacher if she asks for bribes (including anti-corruption investigation and prosecution). The higher bargaining power of the richer households thus may allow them to avoid paying bribes altogether.<sup>10</sup> For example, the village school teacher may not risk asking for bribes for admission of the daughter of a local political leader or landlord, even though a political leader or landlord has higher ability to pay. Alternatively, a household with high bargaining power may choose to refuse to pay when a bribe demand is made, and still get the child admitted into the school.<sup>11</sup> The implications of higher bargaining power associated with higher income in understanding the distributional consequences of corruption is a central focus of this paper. It is important to emphasize that we are not estimating the standard ‘income e¤ect’, our focus is on the e¤ects of higher income when income plays double roles: it represents ability to pay (income e¤ect), and it is also an indicator of a household’s bargaining power that captures, among other things, social and political connections.<sup>12</sup> We model the bargaining power e¤ect as a higher probability of punishment for a corrupt teacher when asking for bribes from a richer household. If the bargaining power e¤ect of household income is strong enough, higher income reduces the propensity to pay bribes; the teacher does not ask for bribes from richer households, thus making bribery regressive at the ‘extensive margin’.

Another important question is whether bribery in schools in developing countries is likely to be progressive at the intensive margin, i.e, among the bribe payers, who pays more, rich or poor? In the standard model above, bribes are ‘weakly progressive’, i.e., the amount of bribes paid increases with income when two conditions are met: (i) the teacher has information about tra¢ c police in Afghanistan, see Azam Ahmed’s article titled “In Kabul’s ‘Car Guantánamo,’Autos Languish and Trust Dies”in New York Times dated February 17, 2013. Ahmed writes “The rules are unevenly applied, punitive to those who can least a¤ord it, and mostly irrelevant to those with money and power ” (italics added). See also Global Corruption Report (2013) on education by Transperancy International for more examples of corruption in education from developing countries.

> 10 One may also call it ‘countervailing power’. For brevity, we use the term ‘bargaining power’.

> 11 The existing literature on corruption focuses on the bargaining game after a teacher asks for bribes, with refusal to pay (zero share of the surplus for the teacher) being one possible outcome. However, the possibility that the teacher may not even ask for bribes when facing a high income household has not been adequately appreciated. The role played by ‘refusal power’in determining who pays bribes in the context of ...rms has been highlighted by Svensson (2003).

> 12 As explained later in more details, the part of social and political capital of a household which is orthogonal to income becomes part of the error term in our framework. However, it does not bias the estimated e¤ect of income precisely because it is not correlated with income.

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