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A Second Best Theory of Institutional Quality

M. Cristina Molinari

Public Organization Review, 2014, vol. 14, issue 4, 545-559

Abstract: This paper illustrates a theory of the second best where the constraints to the achievement of the optimum are of institutional nature. We consider the effects of corruption and bad governance on the public decision to privatize the provision of a service when contracts are incomplete and there is asymmetric information. We show that both corruption and bad governance are detrimental to welfare, but that removing only one of the two is not necessarily beneficial if the other is still present. The theory supplies a possible explanation to the controversial empirical evidence on the economic effects of corruption. Copyright Springer Science+Business Media New York 2014

Keywords: Corruption; Governance; Positive selection; Privatization; Second best (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11115-013-0244-9

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