requires the use of institutions – bureaucracies – to implement policies and make decisions about allocation. Bureaucrats have discretion and power because there is an information asymmetry as to which agents are to be allocated resources through this non-market institution. Red tape is used as a screening device to sort out those individuals who deserve the resource. Red tape is therefore useful but is subject to opportunism as some individuals may masquerade as belonging to the category of those deserving an allocation of the resource when they are not deserving, and can even resort to speed money. In cases where the red tape separates those deserving of resource transfers from the undeserving, collusion and side-payments (bribes) between the bureaucrat and citizen by concealing information also promotes corruption. Like bureaucrats, citizens cannot be trusted either to be fair when it comes to the public allocation of resources for transferring such resources provides rents to those who benefit from them and distorts their incentives to report truthfully about such transfers. We also distinguish between external corruption and internal corruption – collusion between bureaucrats in an organization, typically between a supervisor and his subordinate, that allows subordinates to transfer proceeds from bribes to higher levels in the hierarchy in return for protection. Finally, the bureaucracy is supposed to be accountable to politicians. However, politicians and bureaucrats can also collude and politicians in India exercised control over an otherwise independent bureaucracy through using their power over transfers and postings. Transfers reveal the value of the bribes transacted in a post as bureaucrats bid for lucrative posts. Politicians share in the proceeds and replenish party funds which are then used to influence the electorate.

When different branches of the government collude with each other separation of powers is ineffective in deterring corruption. In such situations public monitoring by the press and other elements of civil society is the important means to deterring corruption. Given the high levels of collusion between bureaucrats and those wrongly favoured with non-market public allocations, between different levels of the bureaucratic hierarchy, and between bureaucrats and politicians, increasing transparency and information in the public domain about the social costs of such activities makes it more difficult for them to thrive. When there is corruption government activity which is promoted to allocating resources conditional on recipients of those resources possessing certain attributes (such as being poor for instance), ends up transferring resources unconditionally and this is socially inefficient. Government allocation is preferable to market allocation but is costlier because corruption may misallocate resources even more than the normal process of bureaucratic allocation without corruption would. This does not mean asking for a complete withdrawal of the state because bureaucratic allocation is still socially useful. Only when the market failure is not pronounced enough to justify government intervention i.e., the cost of monitoring and allocation by bureaucracies is higher than the misallocation by markets, is the case against government intervention really strong. Otherwise, it requires us to design mechanisms that make corruption costly for bureaucrats and politicians. We suggest administrative reforms to simplify laws and procedures, citizens' charters for handling grievances, and codes of conduct prescribing standards of integrity for the public services. There is also a requirement for a greater role for non-constitutional agents – the press, business associations, whistleblowers, academics, NGOs – who keep reporting deceit and fraud and put pressure to increase accountability in the system.

Issues raised: