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Corruption And The Provision Of Public Output In A Hierarchical Asymmetric Information Relationship

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  • Sanjit Dhami

    ()

  • Ali al-Nowaihi

    ()

Abstract

This paper develops a hierarchical principal-agent model to explore the influence of corruption, bribery, and politically provided oversight of production on the efficiency and level of output of some publicly provided good. Under full information, an honest politician acheives the first best while a dishonest politician creates shortages and bribes. Under asymmetric information, however, an honest politician might create more shortages relative to a dishonest one, although, the latter creates greater bribes. Furthermore, the contracted output can be greater or smaller relative to that produced by an unregulated private monopolist. The model identifies a tradeoff between bribery and allocative efficiency. This helps to reconcile some conflicting results on the implications of corruption for the size of the public sector and provides new results on the circumstances under which an improvement in the auditing technology is beneficial. Relative to the static case, in the dynamic renegotiation-proof equilibrium, shortages fall but bribes can increase or decrease, raising important issues of the choice between long-term and short-term contracts.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 05/16.

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Date of creation: Jul 2005
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Handle: RePEc:lec:leecon:05/16

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Related research

Keywords: Corruption; Regulation; Asymmetric Information; Renegotiation-Proofness;

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Cited by:
  1. Maria Cristina Molinari, 2011. "Corruption in Privatization and Governance Regimes," Working Papers 201_28, Department of Economics, University of Venice "Ca' Foscari".

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