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, 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. We find that the government is better-off either completely eliminating
corruption or accepting corruption by offering wages lower than the market wage.
Offering public wage premium that does not deter bribery is suboptimal. When it is
optimal to deter bribery, the government can do it either through wage incentives or
monitoring. The role of wage incentives decreases in societies with higher level of
dishonesty. (JEL D73, H26, J33, J41)
