A Note on Wealth as a Corruption-Controlling Device

In the standard moral hazard model, withholding of effort by the agent is not observable to the principal. We argue that this assumption has to be changed in applications that study corruption. The overwhelming majority of cases where corrupt politicians have been punished involve the detection of consumption levels that appear to be too high. The informativeness of an agent’s level of consumption depends on his initial level of wealth as conspicuous consumption of luxuries by wealthy agents leads to little updating of the principal’s belief about their honesty. This introduces a tendency to choose poor agents as they are easier to monitor. More generally, we show that, even if agents have similar preferences, there are contractual advantages to selecting particular types. We describe the basic problem of choosing agents and monitoring consumption, and discuss a number of features of the practical applications. We show that selecting rich politicians may not help fight corruption and that the political class will exhibit lower variance in consumption than the population. In settings were formal contracts matter, we show that monitoring consumption introduces a tendency towards low powered incentive schemes (and more generally low wages) and that the measure of “moral” costs that is often employed in the literature can be derived (not assumed).