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Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption

Author

Listed:
  • Olsen, T.E.
  • Torsvik, G.

Abstract

Corruption opportunities arise when a principal delegates enforcement or audit authority to a supervisor. The supervisor may then strike a deal with the agent she is supposed to monitor and conceal important information from the principal. Corruption imposes a constraint on governance and appears therefore to be harmful for the principal. We show that this need not be the case. In our model, the prospect of corruption can make the principal better off. The reason is that the collusion possibility generates dynamic effects which, in cases where only limited intertemporal commitments can be made, may be beneficial for the principal.

Suggested Citation

  • Olsen, T.E. & Torsvik, G., 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," Norway; Department of Economics, University of Bergen 179, Department of Economics, University of Bergen.
    • Handle: RePEc:fth:bereco:179
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    Cited by:

    1. Grüner, Hans Peter & Felgenhauer, Mike, 2007. "Safety Nets Within Banks," CEPR Discussion Papers 6317, C.E.P.R. Discussion Papers.
    2. Marisa Ratto & Wendelin Schnedler, 2003. "Too few cooks spoil the broth," The Centre for Market and Public Organisation 03/090, The Centre for Market and Public Organisation, University of Bristol, UK.
    3. Davide Infante & Janna Smirnova, 2010. "Market Failures within Poor Institutions: The Effects of Bureaucrats’ Rent-seeking Activity," Chapters, in: Neri Salvadori (ed.), Institutional and Social Dynamics of Growth and Distribution, chapter 5, Edward Elgar Publishing.
    4. Che, Xiaogang & Huang, Yangguang & Zhang, Le, 2021. "Supervisory efficiency and collusion in a multiple-agent hierarchy," Games and Economic Behavior, Elsevier, vol. 130(C), pages 425-442.
    5. Jaesoo Kim & Dongsoo Shin, 2023. "Vertical Relationships with Hidden Interactions," Games, MDPI, vol. 14(6), pages 1-21, October.
    6. Hans J. Czap & Natalia V. Czap, 2019. "‘I Gave You More’: Discretionary Power in a Corruption Experiment," Journal of Interdisciplinary Economics, , vol. 32(2), pages 200-217, July.
    7. Vafai, Kouroche, 2002. "Preventing abuse of authority in hierarchies," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1143-1166, October.
    8. Ararat L. Osipian, 2013. "Corrupt organizations: modeling educators’ misconduct with cellular automata," Computational and Mathematical Organization Theory, Springer, vol. 19(1), pages 1-24, March.
    9. Fahad Khalil & Jacques Lawarrée & Sungho Yun, 2010. "Bribery versus extortion: allowing the lesser of two evils," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 179-198, March.
    10. Fahad Khalil & Jacques Lawarrée & Sungho Yun, 2007. "Bribery vs. Extortion: Allowing the Lesser of two Evils," CESifo Working Paper Series 1993, CESifo.
    11. Bac, Mehmet & Bag, Parimal Kanti, 2006. "Beneficial collusion in corruption control: The case of nonmonetary penalties," Journal of Development Economics, Elsevier, vol. 81(2), pages 478-499, December.
    12. Osipian, Ararat, 2008. "The World is Flat: Modeling Educators’ Misconduct with Cellular Automata," MPRA Paper 7592, University Library of Munich, Germany.
    13. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
    14. VafaI, Kouroche, 2005. "Abuse of authority and collusion in organizations," European Journal of Political Economy, Elsevier, vol. 21(2), pages 385-405, June.
    15. Alexander Henke & Fahad Khalil & Jacques Lawarree, 2022. "Honest agents in a corrupt equilibrium," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 762-783, August.
    16. Kenny, Charles & Soreide, Tina, 2008. "Grand Corruption in Utilities," Policy Research Working Paper Series 4805, The World Bank.
    17. Dongsoo Shin, 2007. "Contracts under Wage Compression: A Case of Beneficial Collusion," Southern Economic Journal, John Wiley & Sons, vol. 74(1), pages 143-157, July.
    18. Yanhua ZHANG, 2005. "Collusion and Commitment in Bank Bailout," Industrial Organization 0509011, University Library of Munich, Germany.
    19. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    20. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    21. Czap Hans J. & Nur-tegin Kanybek D., 2012. "Government Positions for Sale - A Model of Grand Corruption," Business and Politics, De Gruyter, vol. 14(2), pages 1-27, August.
    22. Fleckinger, Pierre & Martimort, David & Roux, Nicolas, 2023. "Should They Compete or Should They Cooperate? The View of Agency Theory," TSE Working Papers 23-1421, Toulouse School of Economics (TSE), revised Jan 2024.
    23. Marisa Agostini & Giovanni Favero, 2012. "Accounting fraud, business failure and creative auditing: A micro-analysis of the strange case of Sunbeam Corp," Working Papers 12, Department of Management, Università Ca' Foscari Venezia, revised Mar 2013.
    24. Lambsdorff, Johann Graf, 2002. "Making corrupt deals: contracting in the shadow of the law," Journal of Economic Behavior & Organization, Elsevier, vol. 48(3), pages 221-241, July.
    25. Lambsdorff, Johann, 2001. "How corruption in government affects public welfare: A review of theory," University of Göttingen Working Papers in Economics 9, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    CORRUPTION ; INFORMATION;

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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