Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 52: Indirect Monitoring and Optimal Corruption

Ariane Lambert-Mogiliansky

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

JEL-codes: D73; D82; L22

44 pages, April 1995

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