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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 principal-agent model to explore the interaction of corruption, bribery, and political oversight of production. Under full information, an honest politician achieves the first best while a dishonest politician creates shortages and bribes. Under asymmetric information, an honest politician may create more shortages relative to a dishonest one, but the latter creates more bribes. The model identifies a tradeoff between bribery and efficiency. This helps to reconcile some conflicting results on the implications of corruption for the size of the public sector. It also provides new results on the circumstances under which an improvement in the auditing technology is beneficial. The paper identifies conditions under which corruption is welfare enhancing. However, the paper also shows that under precisely these conditions private provision, even by an unregulated monopolist, would be better than public provision. Copyright 2007 Blackwell Publishing, Inc..

Suggested Citation

  • Sanjit Dhami & Ali Al-Nowaihi, 2007. "Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(4), pages 727-755, August.
  • Handle: RePEc:bla:jpbect:v:9:y:2007:i:4:p:727-755
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    References listed on IDEAS

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    1. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    2. Sanjit Dhami & Ali Al-Nowaihi, 2007. "Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(4), pages 727-755, August.
    3. Coolidge, Jacqueline & Rose-Ackerman, Susan, 1997. "High-level rent-seeking and corruption in African regimes : theory and cases," Policy Research Working Paper Series 1780, The World Bank.
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    Cited by:

    1. Sanjit Dhami & Ali Al-Nowaihi, 2007. "Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(4), pages 727-755, August.
    2. Chiappinelli, Olga, 2016. "Political corruption in the execution of public contracts," MPRA Paper 73487, University Library of Munich, Germany.
    3. Maria Cristina Molinari, 2011. "Corruption in Privatization and Governance Regimes," Working Papers 2011_28, Department of Economics, University of Venice "Ca' Foscari".
    4. Toke S. Aidt, 2016. "Rent seeking and the economics of corruption," Constitutional Political Economy, Springer, vol. 27(2), pages 142-157, June.
    5. Olga Chiappinelli, 2016. "Political Corruption in the Execution of Public Contracts," Discussion Papers of DIW Berlin 1607, DIW Berlin, German Institute for Economic Research.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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