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Corruption with Competition Among Hidden Principals

  • Federico Weinschelbaum


    (Department of Economics, Universidad de San Andres)

Generally when there is increased competition on one side of the market, the other side is better off. We study the effects of increased competition among sellers when there is a potentially corrupt agent who procures the good on behalf of a buyer. The model consists of a principal (the owner of a ¯rm), an agent (the manager), and many \hidden principals" (suppliers of an input). Corruption occurs when an agent conspires with one of these hidden principals to appropriate gains at the principal's expense. Suppliers have two key attributes: production cost and \dishonesty" cost (a utility penalty incurred from being corrupt). The effects of increased competition among suppliers depend crucially on whether new suppliers are heterogeneous across these characteristics. When the new suppliers vary according to their productivity levels and/or their honesty levels, there are three possible sources of ine±ciency. First, no transaction may occur, although it is socially e±cient to transact. Second, the most productive supplier may not be used because he is too honest. Third, the most productive supplier may not be used because the principal has (optimally) restricted the pool of potential suppliers. Importantly, we ¯nd that increased competition among sellers may in fact harm the buyer.

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Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 24.

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Length: 27 pages
Date of creation: Jan 2000
Date of revision: Jan 2000
Handle: RePEc:sad:wpaper:24
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  1. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  2. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
  3. Acemoglu, D. & Verdier, T., 1996. "Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach," Working papers 96-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  5. Lui, Francis T., 1986. "A dynamic model of corruption deterrence," Journal of Public Economics, Elsevier, vol. 31(2), pages 215-236, November.
  6. Alberto Ades & Rafael Di Tella, 1997. "The New Economics of Corruption: a Survey and Some New Results," Political Studies, Political Studies Association, vol. 45(3), pages 496-515.
  7. Rose-Ackerman, Susan, 1975. "The economics of corruption," Journal of Public Economics, Elsevier, vol. 4(2), pages 187-203, February.
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