Beneficial collusion in corruption control: the case of nonmonetary penalties

Abstract

We analyze a corruption model where a principal seeks to control an agent's corruption by supplementing a costless noncollusive outside detector such as the media with a collusive internal supervisor. The principal's objective is to minimize the overall costs, made up of enforcement costs and social costs of corruption. If the penalties on the corrupt agent and a failing supervisor are nonmonetary in nature and yet the two parties can engage in monetary side-transfers, the principal may stand to benefit by allowing supervisoragent collusion. This benefit may even prompt the principal to actively encourage collusion by hiring a dishonest supervisor in strict preference over an honest supervisor.