Quid pro quo

This paper attempts to shed some new light on two puzzles about Chinese economy: Rapid economic growth despite pandemic corruption; dramatic development of the private sector despite ‘ownership discrimination' in financial resource allocation. In our model, the productive bribe facilitates the more efficient private firm to obtain the scarce financial resource, either from the bank or from the state-owned enterprise, and corrects the initial allocation distortion. Meanwhile, our model also generates the distortionary and the predatory bribes which hurt the economy.