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Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship

Sanjit Dhami () and Ali Al‐nowaihi
Authors registered in the RePEc Author Service: Ali al-Nowaihi ()

Journal of Public Economic Theory, 2007, vol. 9, issue 4, 727-755

Abstract: This paper develops a principal‐agent model to explore the interaction of corruption, bribery, and political oversight of production. Under full information, an honest politician achieves the first best while a dishonest politician creates shortages and bribes. Under asymmetric information, an honest politician may create more shortages relative to a dishonest one, but the latter creates more bribes. The model identifies a tradeoff between bribery and efficiency. This helps to reconcile some conflicting results on the implications of corruption for the size of the public sector. It also provides new results on the circumstances under which an improvement in the auditing technology is beneficial. The paper identifies conditions under which corruption is welfare enhancing. However, the paper also shows that under precisely these conditions private provision, even by an unregulated monopolist, would be better than public provision.

Date: 2007
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Working Paper: Corruption And The Provision Of Public Output In A Hierarchical Asymmetric Information Relationship (2005) Downloads
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