Red tape, green bribes: Deregulation as an anti-corruption strategy

Corruption in politics is often thought of in narrower terms, such as bribes, kickbacks, or high-profile scandals with millions of dollars of fraud. However, political corruption also takes subtler forms, such as favoritism in contracting, regulatory loopholes, or the exploitation of bureaucratic complexity. At its core, political corruption involves the manipulation of policies, institutions, and procedural rules by decision-makers who abuse their position to sustain power, status, or wealth. Corruption in politics goes well beyond the occasional scandal.

Transparency International (TI) exists to combat corruption by “promoting transparency, accountability, and integrity.” Part of that fight is the Corruption Perceptions Index (CPI), which measures the extent of corruption in each country. Earlier this month, TI published the latest edition of the CPI. The results were far from encouraging. The United States, once considered a stronghold of transparency, has now fallen to its lowest ranking under the current methodology. Meanwhile, the global picture is equally concerning: the world, on average, is trending toward higher levels of corruption.

In response to the CPI release, I noted that these findings were not surprising “because the more there is to regulate, the more there is to corrupt.” While seemingly straightforward, the observation that power and money are magnets for political corruption points to a pattern that merits closer examination.

Paying to proceed

Bribery can be defined as the direct exchange of money, favors, or other benefits to influence a public official’s decision or action. Empirical evidence indicates that countries and firms facing heavier regulatory burdens experience higher rates of bribery. A World Bank–published study using firm-level survey data from 131 mostly developing countries found that heavier regulatory burdens are associated with higher bribery rates. Each 1 percent increase in regulatory burden is correlated with a 0.03 percentage point increase in the incidence of bribery experienced by firms.

A research paper from the European Journal of Political Economy concluded that more burdensome regulatory environments are associated with higher levels of corruption convictions in the United States, even after accounting for confounding institutional and economic factors. The authors argue that as regulatory requirements expand, so do opportunities for firms and individuals to bypass those requirements through bribery. When government officials control access to licenses, permits, or compliance approvals, the value of influencing those decisions rises accordingly.

In this sense, bribery is not merely a moral failure but a predictable response to systems that concentrate discretionary authority over valuable economic activity. As regulatory burden increases, firms are more likely to encounter government officials with the ability to approve, inspect, or delay actions. This bureaucratic discretion encourages firms and officials to engage in corrupt acts if it means acquiring a benefit that exceeds the cost of compliance and delay.

Writing the rules for private gain

Another form of corruption involves gaining economic advantage by manipulating rules or policies rather than through productive activity, a practice known as rent-seeking. Bribery is one mechanism of rent-seeking, but it is hardly the only one. Private actors or firms can influence policy through such legal actions as lobbying, campaign contributions, or regulatory capture without making direct illicit payments. Although most rent-seeking is technically legal, it still presents issues.  

One analysis of Italian government procurement finds that auction procedures with greater bureaucratic discretion and lower competition are associated with higher levels of corruption, which suggests that regulatory frameworks that expand official discretion provide ample opportunity for abuse. Research from 27 member states of the European Union similarly finds that increased regulatory burden results in more biased procurement outcomes.

A study using difference-in-differences design examined a deregulatory reform initiative in China’s Administrative Approval Centers. It found that reducing regulatory burden by streamlining authority and procedures causally reduced corruption at the grassroots level. This Chinese case study illustrates that cutting red tape can cause rent-seeking and other corrupt activities to decline.

These outcomes make sense when framed in incentive terms. Regulation creates decision points, decision points create discretion, discretion creates rents, and those rents create incentives. The more complex the rules, the more opportunities for rent-seeking to occur.

When incentives go rogue

The logic of rent-seeking becomes clearer through the lens of public choice theory, which rejects the romantic assumption that regulators are neutral arbiters. Agencies have incentives to expand jurisdiction, and legislators have incentives to create programs that reward organized constituencies. Gordon Tullock, a leading figure in public choice theory, published a seminal analysis of rent‑seeking showing that when government creates contestable rents, potential beneficiaries expend real resources (e.g., time, effort, lobbying) competing for those rents rather than producing wealth, all of which creates social losses beyond the underlying transfer itself.

By one standard metric, the US federal regulatory apparatus now includes tens of thousands of individual rules. CEI’s Ten Thousand Commandments report systematically counts them each year. This institutional expansion illustrates the fertile ground for rent-seeking and discretionary gaming that public choice theory predicts. As CEI’s reevaluation of Nobel laureate James Buchanan highlights, recognizing these incentives is essential for evaluating the real effects of regulatory expansion.

Complexity as camouflage to game the system

This brings us to the topic of fraud, which is the deliberate exploitation of rules or procedures to gain financial benefit unlawfully. Unlike bribery, which usually involves direct exchange between official and private actors, fraud often occurs through misreporting, overstating claims, or exploiting procedural loopholes.

Examples include the $100-135 billion in pandemic-era unemployment insurance fraud and the $1.36 billion of Medicare fraud detected in 2024. These figures are likely understatements since fraud is inherently difficult to detect. Unlike bribery, which often leaves a direct paper trail, fraudulent claims are frequently embedded within millions of routine transactions, and distinguishing intentional wrongdoing from simple error can be challenging.

This elusiveness explains why the empirical literature on fraud is thinner than that on bribery. Some research on complex US federal programs supports the idea that program design and regulatory complexity influence fraud risk. In the US unemployment insurance system, administrative complexity contributed to high levels of improper payments, a category that includes fraud.

The Government Accountability Office (GAO) has highlighted that the risk of improper payments, which includes fraud, increases in programs with complex criteria, high transaction volumes, or pressures to expedite payments. Similarly, an article from the Journal of Economic Criminology argues that complex regulatory and organizational structures create conditions that facilitate fraud.

This analysis suggests a broader principle: the larger and more complex a government program, the greater the opportunities for abuse and fraudulent behavior. Even without precise causal estimates, program and regulatory complexity are widely recognized as creating fertile ground for fraudulent activity.

Broad institutional research supports this pattern. Studies using the Fraser Institute’s Economic Freedom of the World index find that jurisdictions with greater economic freedom (which includes smaller, less intrusive governments) generally experience lower corruption outcomes, which is consistent with the idea that lighter regulatory burdens reduce opportunities for fraud to flourish.

Trust eroded, corruption emboldened

Fraud and regulatory gamesmanship are more than financial or administrative problems. They erode the very trust and social capital that allow the rule of law to function, which reinforces the cycle of corruption. Empirical research shows that the negative feedback between corruption and trust is particularly strong in democracies, where citizens expect rules to be applied fairly and government officials to act accountably. When these expectations are violated, trust declines sharply and creates a downward spiral. Lower trust weakens oversight and social enforcement, which in turn allows corruption to flourish even further.

In authoritarian systems, by contrast, the link between corruption and trust is weaker, because citizens often expect limited accountability and discretionary rule in the first place. Every byzantine rule and every discretionary decision strengthen corruption. In democracies, corruption slowly eats away at the trust that underpins the rule of law, while it reinforces the concentration of unchecked authority in authoritarian regimes.

Beyond limiting perverse incentives, rebuilding trust also requires reinforcing norms against rent-seeking. As CEI founder Fred Smith and CEI Senior Economist Ryan Young emphasized, economists and policymakers are quick to condemn private-sector rent-seeking and cronyism. They rarely take time to celebrate firms that succeed without exploiting political influence. Understanding and praising this decency can reinforce confidence in markets and institutions while strengthening the social capital that underpins the rule of law.

When fewer rules mean cleaner government

The evidence indicates that corruption is often a byproduct of institutional design, not merely a failure of enforcement. As this paper from the World Bank on bribery in Africa notes, weak institutions also play a role in corruption prevalence. Even so, this does not change the fact that when regulatory systems become dense, opaque, and discretionary, they create perverse incentives for corruption.

This analysis does not imply that all rules are illegitimate. Clear protections for property rights and transparent, predictable laws with minimal burden are essential to economic freedom and the rule of law. However, unnecessary and overly complex regulations, which arguably constitute the vast majority of regulations on the book, impose burdens without corresponding public benefit. In doing so, they expand opportunities for bribery, rent-seeking, and fraud.

There are a number of ways to reduce discretionary authority and the corruption risks it creates, from regulatory sunsets and zero‑based regulation (such as annual sunsets and periodic review cycles) to regulatory budgeting that limits the total cost of rules and better disclosure and accountability tools like regulatory report cards. Because corruption is the abuse of public power for private gain, limiting the discretionary power that officials wield is one of the most effective ways to prevent it.