Signaling corruption through conspicuous consumption

Public officers suspected of corruption are often seen consuming conspicuously luxury goods. Since this raises public awareness about them, it can backfire and lead to an investigation that eventually finds them guilty. One plausible explanation to rationalize this behavior is that they are signaling their willingness to be corrupt, to attract the pool of corrupt firms and obtain higher bribes. In this work, we consider a public procurement setting where the government delegates a procurement officer (PO) to run the process. If the cost of the luxury good is low enough, then there exists a separating equilibrium where the corrupt PO signals his type and obtains a higher bribe. Even if the government fixes a budget constraint or maximum price before assigning a PO, a signaling equilibrium can still exist, but with a lower reserve price than socially optimal. Therefore, even though the government can reduce the bribe revenue, corruption and signaling results in aggregate welfare loss.(This abstract was borrowed from another version of this item.)