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Steal If You Need. Capitulation Wages with Endogenous Monitoring

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  • Wadho, Waqar Ahmed

Abstract

The importance of high salaries to circumvent bureaucratic corruption has been widely recognized in the policy debate. Yet, there appears to be much reluctance when it comes to the implementation. In this paper, we argue that deterring corruption through wage incentives may become prohibitively expensive that the government finds it optimal to accept higher net revenues at the expense of honesty. Deviating from the existing literature, where monitoring is exogenous, which curtails government's anti-corruption policy options; we set an endogenous monitoring technology that allows us to capture the dual role of auditing, as a complement with and as a substitute for wage incentives to deter bribery. Furthermore, besides the efficiency wage and the outside option, the government could pay a wage below the outside option, which attracts only dishonest agents to public office - capitulation wage. We find that when it is costly to monitor tax inspectors, the government is better-off offering capitulation wages and accepting corruption. When it is optimal to deter bribery, the government can do it either through efficiency wages or monitoring. The role of efficiency wages decreases in societies with higher level of dishonesty.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37839.

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Date of creation: 01 Oct 2009
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Handle: RePEc:pra:mprapa:37839

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Related research

Keywords: Corruption; Endogenous monitoring; Capitulation wage; Efficiency wage; Carrot & Stick;

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  1. Rauch, James E & Evans, Peter B., 1999. "Bureaucratic Structure and Bureaucratic Performance in Less Developed Countries," University of California at San Diego, Economics Working Paper Series qt0sb0w38d, Department of Economics, UC San Diego.
  2. Lui, Francis T., 1986. "A dynamic model of corruption deterrence," Journal of Public Economics, Elsevier, vol. 31(2), pages 215-236, November.
  3. Gorodnichenko, Yuriy & Sabirianova Peter, Klara, 2007. "Public sector pay and corruption: Measuring bribery from micro data," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 963-991, June.
  4. Vito Tanzi, 1994. "Corruption, Governmental Activities, and Markets," IMF Working Papers 94/99, International Monetary Fund.
  5. Andvig, Jens Chr. & Moene, Karl Ove, 1990. "How corruption may corrupt," Journal of Economic Behavior & Organization, Elsevier, vol. 13(1), pages 63-76, January.
  6. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Bureaucratic corruption and the rate of temptation: do wages in the civil service affect corruption, and by how much?," Journal of Development Economics, Elsevier, vol. 65(2), pages 307-331, August.
  7. Di Tella, Rafael & Schargrodsky, Ernesto, 2003. "The Role of Wages and Auditing during a Crackdown on Corruption in the City of Buenos Aires," Journal of Law and Economics, University of Chicago Press, vol. 46(1), pages 269-92, April.
  8. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
  9. Skott, Peter, 2005. "Fairness as a source of hysteresis in employment and relative wages," Journal of Economic Behavior & Organization, Elsevier, vol. 57(3), pages 305-331, July.
  10. Nadeem Ul Haque & Ratna Sahay, 1996. "Do Government Wage Cuts Close Budget Deficits? Costs of Corruption," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 754-778, December.
  11. James E. Alt & David Dreyer Lassen, 2010. "Enforcement and Public Corruption: Evidence from US States," EPRU Working Paper Series 2010-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  12. Goel, Rajeev K & Nelson, Michael A, 1998. " Corruption and Government Size: A Disaggregated Analysis," Public Choice, Springer, vol. 97(1-2), pages 107-20, October.
  13. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  14. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, vol. 103(416), pages 119-41, January.
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