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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.

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
    DOI: 10.1111/j.1467-9779.2007.00328.x
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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, December.
    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. Mr. Vito Tanzi & Mr. Hamid R Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 1997/139, International Monetary Fund.
    4. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
    5. 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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    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. Toke S. Aidt, 2016. "Rent seeking and the economics of corruption," Constitutional Political Economy, Springer, vol. 27(2), pages 142-157, June.
    3. Chiappinelli, Olga, 2020. "Political corruption in the execution of public contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 116-140.
    4. Maria Cristina Molinari, 2011. "Corruption in Privatization and Governance Regimes," Working Papers 2011_28, Department of Economics, University of Venice "Ca' Foscari".

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    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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