Reputation and Delegated Public Spending

Emin Ablyatifov and Georgy Lukyanov

Papers from arXiv.org

Abstract: This paper studies a repeated funding relationship between a grant administrator and an implementing agency. The agency is either committed to implementation or able to divert the advance. The administrator chooses whether to fund and whether to verify, but cannot commit to future decisions. We construct a stationary equilibrium in which agencies with intermediate reputations are audited. An inspection either reveals diversion and ends funding or leads to continued funding with intermittent auditing. In the latter case, audits sustain implementation without further revealing type, while a strategic agency diverts unaudited advances. Cheaper auditing makes funding worthwhile at lower reputations. For initial beliefs audited under both cost levels, it raises the administrator's value but reduces expected long-run implemented spending: a higher reputation is required to retain funding, and fewer strategic agencies meet that requirement. For beliefs audited under both programs, better detection at unchanged cost instead raises implementation without changing the probability of continued funding. These results show why project delivery alone need not measure the value of improved monitoring.

Date: 2025-09, Revised 2026-10
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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