Corruption : Top Down or Bottom Up?

We study the degree of corruption in a hierarchical model of government. In particular, we explore the question of whether adding a layer of government simply increases the total amount of corruption or generates an organizational efficiency (via a principal-agent relationship between levels of government) that reduces the total amount of corruption. It is shown that when the after tax relative profitability of the formal sector as compared to that of the informal sector is high enough, adding a layer of government does in fact increase the total amount of corruption. On the other hand, for high enough public wages and/or an efficient monitoring technology of the bureaucratic system, 'centralization' of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level but actually reduces total corruption in the process