That corruption adversely affects economic development has become a commonplace assertion in academia and public discussion. Identifying the precise reasons for this impact is not straightforward, however. I show here that at the core of understanding the social consequences of corruption is the bureaucrats’ failure to commit to honesty once they are ready to take bribes. The downside of public servants’ willingness to take bribes is that these officials disqualify for professions where their commitment to honesty would be vital. This downside effect may certainly also hurt the reputation of honest colleagues in the public service without compensating them by income from bribery.

Corruption involves the malfunctioning of some (or all) areas of the public sector. Crucial to this malfunctioning is that individuals or whole units within these sectors serve themselves and not the public. Those who study the effects of corruption on welfare are confronted with a multitude of models. Since each has its specific benefits and deficiencies, the choice of an adequate model is complicated and crucial at the same time.

Crucial to an understanding of the effects of bureaucratic corruption is its relationship to bureaucratic discretion and distorting regulation. I claim that a sound assessment of the effects of corruption on public welfare remains inconclusive when regulations are considered exogenous to the analysis. This results because corruption and bad regulation are often two sides of the same coin. A principal–agent model is taken as a framework of analysis for the subsequent sections.