Steal If You Need. Capitulation Wages with Endogenous Monitoring

Wadho, Waqar Ahmed (2009): Steal If You Need. Capitulation Wages with Endogenous Monitoring.

Abstract

The importance of high salaries to circumvent bureaucratic corruption has been widely recognized in the policy debate. Yet, there appears to be much reluctance when it comes to the implementation. In this paper, we argue that deterring corruption through wage incentives may become prohibitively expensive that the government finds it optimal to accept higher net revenues at the expense of honesty. Deviating from the existing literature, where monitoring is exogenous, which curtails government's anti-corruption policy options; we set an endogenous monitoring technology that allows us to capture the dual role of auditing, as a complement with and as a substitute for wage incentives to deter bribery. Furthermore, besides the efficiency wage and the outside option, the government could pay a wage below the outside option, which attracts only dishonest agents to public office - capitulation wage. We find that when it is costly to monitor tax inspectors, the government is better-off offering capitulation wages and accepting corruption. When it is optimal to deter bribery, the government can do it either through efficiency wages or monitoring. The role of efficiency wages decreases in societies with higher level of dishonesty.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corruption, Endogenous monitoring, Capitulation wage, Efficiency wage, Carrot & Stick
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

References

Andvig, J.C and Moene, K.O, (1990) "How Corruption May corrupt", Journal of Economic Behavior and Organizations, 13, 63-76.

Alt, James E and Lassen, D, D. (2010) "Enforcement and Public Corruption: Evidence from US States", University of Copenhagen Department of Economics EPRU Working Paper No. 2010-08.

Becker, G. and G. Stigler, (1974) "Law Enforcement, Malfeasance and the Compensation of Enforcers", Journal of Legal Studies, 3, 1, 1-19.

Besley, T. and J. McLaren, (1993) "Taxes and Bribery: The Role of Wage Incentives", The Economic Journal, 103, 416, 119-41.

Di Tella, Rafael, and Ernesto Schargrodsky, (2003) "The Role of Wages and Auditing during a Crackdown on Corruption in the City of Buenos Aires," Journal of Law and Economics.

Goel, R. and M. Nelson (1998) "Corruption and Government Size: A Disaggregated Analysis", Public Choice, 97, 107-20.

Gorodnichenko, Yuriy, and Klara Sabirianova Peter, (2007) "Public Sector Pay and Corruption:Measuring Bribery from Micro Data," Journal of Public Economics 91 (2007): 963-991.

Haque, N. U. and Sahay, R. (1996) "Do government wage cuts close budget deficits? Costs of corruption." IMF Staff Papers 43 (December), 754--778.

Klitgaard, R. (1988) Controlling Corruption, Berkeley: University of California Press.

Levi, M. (1988) Of Rule and Revenue. Berkeley: University of California Press.

Lui, F. (1986) "A Dynamic Model of Corruption Deterrence", Journal of Public Economics, 31, 2, 215-236.

Myrdal, G., (1968) Asian Drama: an Inquiry into the Poverty of Nations. Twentieth Century Fund, New York.

Rauch, J. and P. Evans (2000) "Bureaucratic Structure and Bureaucratic Performance in Less Developed Countries", Journal of Public Economics, 75, 1, 49-71.

Scott, Peter (2005) "Fairness as a source of hysteresis in employment and relative wages," Journal of Economic Behavior & Organization, 57(3), 305-331.

Tanzi, V., (1994) "Corruption, Governmental Activities, and Markets", IMF Working Paper No. 94/99.

Treisman, D. (2000) "The Causes of Corruption: a Cross-National Study", Journal of Public Economics, 76, 3, 399-457.

Van Rijckeghem, C. and Weder, B. (2001) "Bureaucratic Corruption and the Rate of Temptation: Do Wages in the Civil Service Affect Corruption, and by How Much?", Journal of Development Economics, 65, 2, 307-331.