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Signaling corruption through conspicuous consumption

Author

Listed:
  • Pablo Zárate

    (Department of Economics, Universidad de San Andrés)

Abstract
Public officers suspected of corruption are often seen consuming conspicuously luxury goods. Since this raises public awareness about them, it can backfire and lead to an investigation that eventually finds them guilty. One plausible explanation to rationalize this behavior is that they are signaling their willingness to be corrupt, to attract the pool of corrupt firms and obtain higher bribes. In this work, we consider a public procurement setting where the government delegates a procurement officer (PO) to run the process. If the cost of the luxury good is low enough, then there exists a separating equilibrium where the corrupt PO signals his type and obtains a higher bribe. Even if the government fixes a budget constraint or maximum price before assigning a PO, a signaling equilibrium can still exist, but with a lower reserve price than socially optimal. Therefore, even though the government can reduce the bribe revenue, corruption and signaling results in aggregate welfare loss.

Suggested Citation

  • Pablo Zárate, 2021. "Signaling corruption through conspicuous consumption," Young Researchers Working Papers 2, Universidad de San Andres, Departamento de Economia, revised Oct 2022.
    • Handle: RePEc:sad:ypaper:2
    as

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    File URL: https://webacademicos.udesa.edu.ar/pub/econ/ydoc2.pdf
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    References listed on IDEAS

    as
    1. Roberto Burguet & Juan José Ganuza & José Garcia Montalvo, 2016. "The microeconomics of corruption. A review of thirty years of research," Economics Working Papers 1525, Department of Economics and Business, Universitat Pompeu Fabra.
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    More about this item

    Keywords

    corruption;

    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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