Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption

Trond Olsen and Gaute Torsvik

International Economic Review, 1998, vol. 39, issue 2, 413-38

Abstract: Corruption opportunities arise when a principal delegates enforcement or audit authority to a supervisor. The supervisor may then strike a deal with the agent she is supposed to monitor and conceal important information from the principal. Corruption imposes a constraint on governance and appears therefore to be harmful for the principal. The authors show that this need not be the case. In their model, the prospect of corruption can make the principal better off. The reason is that the collusion possibility generates dynamic effects which, in cases where only limited intertemporal commitments can be made, may be beneficial for the principal. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1998
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