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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.

Suggested Citation

  • Wadho, Waqar Ahmed, 2009. "Steal If You Need. Capitulation Wages with Endogenous Monitoring," MPRA Paper 37839, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37839
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    File URL: https://mpra.ub.uni-muenchen.de/37839/1/MPRA_paper_37839.pdf
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    References listed on IDEAS

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    1. Rauch, James E. & Evans, Peter B., 2000. "Bureaucratic structure and bureaucratic performance in less developed countries," Journal of Public Economics, Elsevier, vol. 75(1), pages 49-71, January.
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    More about this item

    Keywords

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

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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