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Mr. Per G. Fredriksson, Mr. Muthukumara Mani, and Richard Damania

bureaucracy. 3 The true emission levels are assumed to be unobservable, so that environmental inspectors must monitor the firm’s emission level. If the inspectors and politicians are assumed to be self interested, then the firm could reduce its emission tax burden by either (1) bribing the tax inspector, or (2) lobbying the government for both a lower tax rate and a more permissive regulatory regime. To combat administrative corruption, the government may undertake institutional reforms to improve the efficiency of the judiciary and the level of regulatory compliance