Corruption and the Public Display of Wealth

Abstract

We build a principal-agent-client model of corruption, allowing for heterogeneity in the value of public projects relative to the cost of monitoring their execution and for uncertainty of corruptors regarding the value of a project conducted. We derive the conditions under which officials with low-value projects have an incentive to signal their projects' type, and thereby facilitate their corruption, by means of public displays of wealth. While such public displays reduce the probability with which bribes are offered to officials conducting high-value projects, they increase the probability with which these officials accept bribes sufficiently to offset any positive effect.