Regulatory Ambiguity and Corruption
Corruption "in the fabric" of a regulatory system refers to a situation in which a regulatory agency seeks to extract rents for itself by interpreting and enforcing its statutory authority in an ambiguous manner. Regulatory ambiguity is associated with the creation of superfluous and apparently random loopholes which affect private agents under circumstances which are difficult to predict, and hence hard to avoid. This paper examines the role of regulatory authority by means of a model in which the regulatory authority extracts a fee for enforcing or voiding private agreements, in light of circumstances which have occurred after the agreement was formed, according to a system of rules which can be either ambiguous or clear.
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