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

29 Pages Posted: 11 Dec 2007

See all articles by Sanjit Dhami

Sanjit Dhami

University of Leicester

Ali al-Nowaihi

University of Leicester - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2005-11-14

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 trade-off 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.

Suggested Citation

Dhami, Sanjit and al-Nowaihi, Ali, Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship (2005-11-14). Journal of Public Economic Theory, Vol. 9, Issue 4, pp. 727-755, August 2007, Available at SSRN: https://ssrn.com/abstract=1067125 or http://dx.doi.org/10.1111/j.1467-9779.2007.00328.x

Sanjit Dhami (Contact Author)

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

Ali Al-Nowaihi

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

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