SSE/EFI Working Paper Series in Economics and Finance
Indirect Monitoring and Optimal Corruption
Abstract: Corruption is a widespread phenomenon around the world.
Yet, models of hierarchical agency relationships tend not to predict
collusion. The paper demonstrates that allowing collusion may be optimal if
the principal cannot commit to an incentive scheme once and for all. The
optimal extent of corruption depends on the efficacy of the legal system.
It must be risky for the guilty parties to engage in corruption in order to
make it worthwile curbing it.
Keywords: Commitment; collusion; renegotiation; (follow links to similar papers)
JEL-Codes: D73; D82; L22; (follow links to similar papers)
44 pages, April 1995
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