Corruption And The Provision Of Public Output In A Hierarchical Asymmetric Information Relationship

Sanjit Dhami and Ali al-Nowaihi ()

No 05/16, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: This paper develops a hierarchical principal-agent model to explore the influence of corruption, bribery, and politically provided oversight of production on the efficiency and level of output of some publicly provided good. Under full information, an honest politician acheives the first best while a dishonest politician creates shortages and bribes. Under asymmetric information, however, an honest politician might create more shortages relative to a dishonest one, although, the latter creates greater bribes. Furthermore, the contracted output can be greater or smaller relative to that produced by an unregulated private monopolist. The model identifies a tradeoff between bribery and allocative efficiency. This helps to reconcile some conflicting results on the implications of corruption for the size of the public sector and provides new results on the circumstances under which an improvement in the auditing technology is beneficial. Relative to the static case, in the dynamic renegotiation-proof equilibrium, shortages fall but bribes can increase or decrease, raising important issues of the choice between long-term and short-term contracts.

Keywords: Corruption; Regulation; Asymmetric Information; Renegotiation-Proofness (search for similar items in EconPapers)
JEL-codes: D78 D82 L51 (search for similar items in EconPapers)
Date: 2005-07
New Economics Papers: this item is included in nep-gth, nep-pol and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship (2007)
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