Graft, Bribes, and the Practice of Corruption

We construct a dynamic model of corruption in organizations where officials privately know their propensity for corruption and clients optimally choose the bribe offered. We show that there is a continuum set of stationary bribe equilibria due exclusively to the dynamic nature of the model and the endogenous determination of bribes. This can explain why similar countries have stable but different "implicit prices" for the same illegal services. We also show that, by not considering the reaction of clients, traditional analysis have systematically overestimated the beneficial effect of increasing wages as an anticorruption measure.     

Graft, Bribes, and the Practice of Corruption

We construct a dynamic model of corruption in organizations where officials privately know their propensity for corruption and clients optimally choose the bribe offered. We show that there is a continuum set of stationary bribe equilibria due exclusively to the dynamic nature of the model and the endogenous determination of bribes. This can explain why similar countries have stable but different "implicit prices" for the same illegal services. We also show that, by not considering the reaction of clients, traditional analysis have systematically overestimated the beneficial effect of increasing wages as an anticorruption measure.     

Corruption and auctions

We investigate how corruption affects the outcome of a first-price auction (bidding behavior, efficiency and the seller’s expected revenue). The auctioneer approaches the winner to offer the possibility of a reduction in his bid in exchange for a bribe. The bribe can be a percentage of the difference between the winning and the second-highest bid or a fixed amount. We show that there exists a symmetric bidding strategy equilibrium that is monotone, i.e., higher valuation buyers bid higher. Corruption does not affect efficiency but both the auctioneer’s expected bribe and the seller’s expected revenue depend on the format of the bribe payments. We also find the optimal bribe scheme.     

Competition,regulation and bribery

Bribery of government officials is commonly used to obtain contracts in many foreign countries. The Foreign Corrupt Practices Act of 1977 (FCPA) made it illegal for US firms to pay bribes, even in the absence of regulation on the bribe-taking side of the transaction. Opponents of the law claimed it would put US firms at a competitive disadvantage relative to foreign suppliers who were not subject to the same regulation. This paper models the effects of two types of anti-bribery regulation. In general, regulation of bribe takers reduces the disciplinary effect of competition and is ineffective in deterring bribery unless the penalties exceed the gains. The impact of regulation of bribe payers (i.e. suppliers) depends on whether the law is applicable to all bribe payers, firms' costs and the existence of contract price constraints on the purchasing side of the transaction. The results lead to empirically testable hypotheses about US exports to bribery-prone countries.     

Asymmetric‐information allocation to avoid coordination failure

In the context of team production, this paper studies the optimal (deterministic and stochastic) information allocation that implements desired effort levels as the unique Bayesian equilibrium. We show that under certain conditions, it is optimal to asymmetrically inform agents even though they may be ex ante symmetric. The main intuition is that informing the agents asymmetrically can be effective in avoiding “bad” equilibria, that is, equilibria with coordination failure.     

Inefficiency and complementarity in sharing games

A sharing game is a very simple device for partially reconciling an organization’s goal with the interests of its members. Each member chooses an action, bears its cost, and receives a share of the revenue which the members’ actions generate. A (pure-strategy) equilibrium of the game may be inefficient: surplus (revenue minus the sum of costs) may be less than maximal. In a previous paper, we found that for a wide class of reward functions, no one squanders at an inefficient equilibrium (spends more than at an efficient profile) if the revenue function has a complementarity property. In the present paper, we examine the “opposite” of the complementarity property (Substitutes) and we study a class of finite games where squandering equilibria indeed occur if Substitutes holds strongly enough. Squandering equilibria play a key role when one traces the effect of technological improvement on a sharing game’s surplus shortfall. We then turn to the question of choice among reward functions in a principal/agents setting. We find that if we again assume complementarity then strong conclusions can be reached about the reward functions preferred by “society”, by the players (agents), and by the principal.     

Coping with Autonomy

Abstract

The question examined in this article is how decentralization of power and responsibilities in public administration affects the interaction between bureaucrats and politicians. Three factors were identified as potential predictors: executive authority; the nature of administrative decision making; and the nature of the relationship between bureaucrats and union officials. Data were collected through a survey administered to ninety-eight senior bureaucrats at the county level in Norway. Correlation and hierarchical regression analyses revealed that the character of the relationship between bureaucrats and union officials had the greatest impact on the interaction between bureaucrats and politicians. The more trustful the relationship, the less the interaction, while the stronger the dependency of bureaucrats on unions, the more intensive the interaction. Decision making that involves negotiations increased interaction, as did the bureaucrats' perception of themselves as clearly superior to their staff – as opposed to a perception of themselves as being in an advisory position.     

The Welfare Effects of Consumers' Reports of Bribery

A primary means of bureaucratic oversight is consumer complaints. Yet this important control mechanism has received very little attention in the literature on corruption. I study a signaling game of corruption in which uninformed consumers require a government service from informed officials. A victim of corruption can report corrupt officials whose supervisors are negligent or conscientious but an official's type is his private information. I find that social welfare may be nonmonotonic in the proportion of conscientious supervisors. Several examples show that an increase in the proportion of conscientious supervisors decreases social welfare if the mass of conscientious supervisors is below a critical level. I find that this perverse result does not hold if (a) the bribe is very large, or (b) bribe‐giving is legalized. I also find that there is an equilibrium in which no one reports corruption.     

The revealed preferences of a local government: Black/white disparities in scholastic achievement

Many studies of the educational sector implicitly assume schools attempt only to maximize student cognitive achievement subject to a budget constraint. The validity of this assumption is tested in this paper. In specific, the preferences of a representative bureaucrat in an urban school system are estimated. The results indicate he does not simply maximize achievement. The representative bureaucrat also has preferences with respect to the distribution of inputs and outputs between black and white children.     

Managerial delegation games and corporate social responsibility

In a duopoly in which firms universally engage in corporate social responsibility (CSR) activities, this paper shows that, in contrast to the main tenet of the received managerial delegation literature, if the CSR sensitivity is sufficiently high: (a) when both firms delegate output decisions to managers, at the equilibrium profit (resp. consumer welfare) is higher (resp. lower) than when firms are pure CSR; (b) in a managerial delegation game, asymmetric multiple subgame perfect Nash equilibria emerge in which one firm delegates and the rival does not. These results hold under both the “sales delegation” and “relative profits” manager's bonus schemes.     

Keyword auctions with budget-constrained bidders

We study a keyword auction model where bidders have constrained budgets. In the absence of budget constraints, Edelman et al. (Am Econ Rev 97(1):242–259, 2007) and Varian (Int J Ind Organ 25(6):1163–1178, 2007) analyze “locally envy-free equilibrium” or “symmetric Nash equilibrium” bidding strategies in generalized second-price auctions. However, bidders often have to set their daily budgets when they participate in an auction; once a bidder’s payment reaches his budget, he drops out of the auction. This raises an important strategic issue that has been overlooked in the previous literature: Bidders may change their bids to inflict higher prices on their competitors because under generalized second-price, the per-click price paid by a bidder is the next highest bid. We provide budget thresholds under which equilibria analyzed in Edelman et al. (Am Econ Rev 97(1):242–259, 2007) and Varian (Int J Ind Organ 25(6):1163–1178, 2007) are sustained as “equilibria with budget constraints” in our setting. We then consider a simple environment with one position and two bidders and show that a search engine’s revenue with budget constraints may be larger than its revenue without budget constraints.     

Who bribes in public contracting and why: worldwide evidence from firms

We study procurement bribery utilizing survey data from 11,000 enterprises in 125 countries. About one-third of managers report that firms like theirs bribe to secure a public contract, paying about 8 % of the contract value. Econometric estimations suggest that national governance factors, such as democratic accountability, press freedom, and rule of law, are associated with lower bribery. Larger and foreign-owned firms are less likely to bribe than smaller domestic ones. But among bribers, foreign and domestic firms pay similar amounts. Multinational firms appear sensitive to reputational risks in their home countries, but partially adapt to their host country environments.     

Nash equilibrium reconsidered and an option for maximin

In this paper we will discuss some peculiarities of the Nash equilibrium which are at odds with its standard applications: (a) the underlying dynamic interpretation, (b) the incentive independency if equilibria are mixed, and (c) the unprofitability if equilibrium and maximin are mixed and the game is 2-by-2. Maximin is proposed as an alternative solution concept in “relevant situations”.     

Strong Nash equilibrium in games with common and complementary local utilities

A rather general class of strategic games is described where the coalitional improvements are acyclic and hence strong Nash equilibria exist: The players derive their utilities from the use of certain facilities; all players using a facility extract the same amount of local utility therefrom, which amount depends both on the set of users and on their actions, and is decreasing in the set of users; the ultimate utility of each player is the minimum of the local utilities at all relevant facilities. Two important subclasses are “games with structured utilities,” basic properties of which were discovered in 1970s and 1980s, and “bottleneck congestion games,” which attracted researchers’ attention quite recently. The former games are representative in the sense that every game from the whole class is isomorphic to one of them. The necessity of the minimum aggregation for the existence of strong Nash equilibria, actually, just Pareto optimal Nash equilibria, in all games of this type is established.     

Constrained suboptimality when prices are non-competitive

The paper addresses the following question: how efficient is the market system in allocating resources if trade takes place at prices that are not competitive? Even though there are many partial answers to this question, an answer that stands comparison to the rigor by which the first and second welfare theorems are derived is lacking. We first prove a “Folk Theorem” on the generic suboptimality of equilibria at non-competitive prices. The more interesting problem is whether equilibria are constrained optimal, i.e. efficient relative to all allocations that are consistent with prices at which trade takes place. We discuss an optimality notion due to Bénassy, and argue that this notion admits no general conclusions. We then turn to the notion of p-optimality and give a necessary condition, called the separating property, for constrained optimality: each constrained household should be constrained in each constrained market. If the number of commodities is less than or equal to two, the case usually treated in the textbook, then this necessary condition is also sufficient. In that case equilibria are constrained optimal. When there are three or more commodities, two or more constrained households, and two or more constrained markets, this necessary condition is typically not sufficient and equilibria are generically constrained suboptimal.     

The impact of the foreign corrupt practices act on us exports

In 1977 the Foreign Corrupt Practices Act (FCPA) was enacted to penalize US firms and their employees for paying bribes to foreign government officials. If bribe payments influence the awarding of contracts and the FCPA regulation differentially affects US exporters compared to foreign competitors, then US exporters' bribe-paying ability and market share would be expected to decline. This study provides empirical evidence that the FCPA had a negative effect on US exports to non-Latin American countries but not to bribery prone ones in Latin America.     

Bureaucracy, monopoly, and the demand for municipal services

A model of municipal budget allocation is constructed. It is assumed that municipalities elect mayors whose preferences reflect those of their constituents and that the bureaucrats heading the public agencies are private-wealth maximizers. Following Niskanen it is argued that bureaucrats exploit their mayors in order to maximize their salaries which implies that the price-elasticity for municipal services will be unitary. A price index is constructed, and the implication is tested on a sample of 81 U.S. cities over the period 1951–1973. The time-series estimates of price, population, and income elasticities are compared with those of Bergstrom and Goodman and Borcherding and Deacon.     

Relational consumption and nonlinear dynamics in an overlapping generations model

In this paper, we show that incorporating the relational dimension into an otherwise standard OLG model and focusing on dynamic leisure externalities leads to dramatically different predictions. Here, we show that when the old perceive private and relational consumption as substitutable goods, a series of interesting dynamic outcomes—such as local indeterminacy, nonlinear phenomena (including chaotic dynamics) and even multiple equilibria with global indeterminacy—may arise. We also draw some welfare implications and relate them to the well-known “happiness paradox” arising within contemporary affluent societies.     

On the diffuseness of incomplete information game

We introduce the “relative diffuseness” assumption to characterize the differences between payoff-relevant and strategy-relevant diffuseness of information. Based on this assumption, the existence of pure strategy equilibria in games with incomplete information and general action spaces can be obtained. Moreover, we introduce a new notion of “undistinguishable purification” which strengthens the standard purification concept, and its existence follows from the relative diffuseness assumption.     

Minimal state variable solutions to Markov-switching rational expectations models

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models. This feature is essential if one is interested in using a likelihood based approach to estimation.