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Doesn't the argument that penalizing corruption may lead to a reduction in licenses applied for assume that there is no way of getting a license without paying a bribe?
I agree, that last part was a pretty poor argument. It assumed on the one hand that you are reducing competition by locking up Corrupt officials but then also assumes there is no competitive pressure from non-corrupt officials working in the same market of issuing licenses. - You could just as easily argue that nigher penalization would increase the numbers of non-corrupt license issuers and hence by market mechanisms reduce bribe costs. As licensees would just go see a non-corrupt licenser.
In that case, it may be that the "honest" officials take it very easy when granting a license. So maybe it takes them 4 months to produce all the paperwork, whereas going to the more "corrupt" official might speed up the process by costing more in terms of cash.