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Investigating corruption

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  • Prendergast, Canice

Abstract

Agency theory has had little to say about the control of bureaucratic corruption, perhaps the greatest agency problem that exists. The author considers the role of incentive contracting in reducing corruption through the use of independent investigations-a common way to monitor corruption. In simple settings, bureaucratic corruption can be suppressed by rewarding and penalizing bureaucrats, depending on the independent investigators'findings. But the author shows that incentive contracts can change behavior in both undesirable and beneficial ways. He analyzes three possible harmful behavioral responses to investigations. 1) Many investigations are (officially) instigated by customer complaints. Bureaucrats could become overinterested in"keeping the customer happy,"even when it is not efficient to do so. 2) Bureaucrats often have private information on how cases should be handled, information that is hard for investigators to verify. The author shows that investigations can give bureaucrats excessive incentives to"do things by the book,"offering decisions that are more likely to be consistent with the opinions of their superiors. 3) Bureaucrats sometimes collect bribes to"look the other way"-that is, ignore known transgressions. A solution to this problem might be to offer rewards for bringing cases to light, but a bureaucrat could then waste resources by generating"nuisance cases"simply to receive the bonus. In each of these cases, harmful responses to investigations and incentives may be costly enough that it would be more efficient simply to pay a flat wage and accept some corruption. In other words, incentive contracts may not work so well in reducing bureaucratic corruption, because of the variety of dysfunctional responses that investigations may elicit. It may be best to limit investigations to cases where the investigator can find direct evidence of wrongdoing (for example, cash being handed over, or bureaucrats living beyond their means).

Suggested Citation

  • Prendergast, Canice, 2000. "Investigating corruption," Policy Research Working Paper Series 2500, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2500
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    References listed on IDEAS

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    1. Abhijit V. Banerjee, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1289-1332.
    2. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437, Elsevier.
    3. Frank Flatters & W. Macleod, 1995. "Administrative corruption and taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(3), pages 397-417, October.
    4. Jean Tirole, 1985. "Hierarchies and Bureaucracies," Working papers 363, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
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    Cited by:

    1. Rafael Di Tella & Federico Weinschelbaum, 2008. "Choosing Agents and Monitoring Consumption: A note on Wealth as a Corruption‐Controlling Device," Economic Journal, Royal Economic Society, vol. 118(532), pages 1552-1571, October.
    2. Nicolas Jacquemet, 2005. "La corruption comme une imbrication de contrats : Une revue de la littérature microéconomique," Working Papers 2005-29, Center for Research in Economics and Statistics.
    3. Sah, Raaj, 2007. "Corruption across countries and regions: Some consequences of local osmosis," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2573-2598, August.
    4. Mitusch, Kay, 2006. "Non-commitment in performance evaluation and the problem of information distortions," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 507-525, August.
    5. Debora Di Gioacchino & Maurizio Franzini, 2008. "Bureaucrats’ corruption and competition in public administration," European Journal of Law and Economics, Springer, vol. 26(3), pages 291-306, December.

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