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A Note on Wealth as a Corruption-Controlling Device

  • Federico Weinschelbaum

    ()

    (Department of Economics, Universidad de San Andres)

  • Rafael Di Tella

    (Harvard Business School)

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).

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc83.pdf
File Function: First version, 2005
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Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 83.

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Length: 24 pages
Date of creation: Mar 2005
Date of revision: Mar 2005
Handle: RePEc:sad:wpaper:83
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  1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  2. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Bureaucratic corruption and the rate of temptation: do wages in the civil service affect corruption, and by how much?," Journal of Development Economics, Elsevier, vol. 65(2), pages 307-331, August.
  3. Rasmusen, Eric, 1992. "An Income-Satiation Model of Efficiency Wages," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 467-78, July.
  4. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Julio Rotemberg & Garth Saloner, 2000. "Visionaries, Managers, and Strategic Direction," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 693-716, Winter.
  7. Mookherjee, Dilip & Png, I P L, 1995. "Corruptible Law Enforcers: How Should They Be Compensated?," Economic Journal, Royal Economic Society, vol. 105(428), pages 145-59, January.
  8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  9. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, vol. 103(416), pages 119-41, January.
  10. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  11. Dickens, William T, et al, 1989. "Employee Crime and the Monitoring Puzzle," Journal of Labor Economics, University of Chicago Press, vol. 7(3), pages 331-47, July.
  12. Tirole, J., 1993. "The Internal Organization of Government," Working papers 93-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  14. Rose-Ackerman, Susan, 1975. "The economics of corruption," Journal of Public Economics, Elsevier, vol. 4(2), pages 187-203, February.
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