Among the transaction costs involved in any economic activity, the costs of the administrative procedures that must be carried out to undertake that activity must also be considered. Therefore, the administrative procedures, and requirements established by legal provisions for the granting of authorizations, permits, licenses, etc., are relevant for individuals when deciding whether to carry out an activity, business, or transaction.

Our assertion is that overregulation can cause corruption to be the efficient solution. To prove this assertion, let us use a hypothetical situation (any resemblance to reality…). For the construction of a building where a company’s commercial offices will be, administrative procedures require a land use permit, for which a city council inspector must visit the site and examine the suitability of the land for the proposed purposes. Next, a supervisor from the water authority must go to determine whether the land has adequate drainage. Subsequently, an inspector from the authority responsible for supervising building construction in that part of the city will visit to determine whether the building to be constructed complies with each of the guidelines established for that type of construction and fill out a number of forms with information that is repeated in each administration, which, needless to say, are as detailed as any Renaissance work of art. Add to this the corresponding similar procedures throughout the entire construction process, until completion.

In addition to the above, consider that at each stage it is necessary to pay fees established by the administration, and that the physical presence of each of the aforementioned inspectors/supervisors is required. Of course, each administration has a very limited number of staff, so it is also worth considering the waiting time for staff to be available to go to the property. The essential point in this example is to know that these administrative requirements are a prerequisite, and that without completing each and every one of them, it is not possible to start the business or economic activity.

This has already been studied in detail, and what I am saying is nothing new, but it is something worth considering: the costs created by regulations such as those described above make certain economic activities not worth your while. In other words, the costs are so high that they far exceed the potential benefits that could be obtained from the business to be carried out, therefore, embarking on these affected economic activities is inefficient. Faced with this situation, any rational person will refrain from carrying out economic activities under such conditions.

Is there a quick way out of this for citizens? Well, in fact, if there is a way to avoid one or more of these requirements, to obtain the necessary approvals without the inspectors having to go to the property in question, the costs (in money and time) will be considerably reduced. Unfortunately, the quickest and easiest solution could be to bribe or corrupt the inspectors; and in fact, if in a situation such as the one described above there were no such possibility, few people would embark on construction projects.

What we can observe, then, is that when regulation creates unnecessary barriers in the form of overly detailed requirements or unachievable specifications, citizens have two options: not to engage in the economic activity, since the costs outweigh the potential benefits; or to bypass those steps through corruption, and that is precisely when corruption becomes efficient.

Therefore, corruption is not only fueled by officials with low morals or corrupt individuals; it also grows and is sustained by ordinary citizens who want to engage in economic activities and whose only obstacle is the regulatory overload of the system in which they find themselves. This is how overregulation becomes an accomplice to corruption. The partial solution to the problem of corruption, although obvious, is not easy to implement; however, it is not impossible.