Beneficial collusion in corruption control: The case of non-monetary penalties

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 nortmonetary in nature and yet the two parties can engage in monetary side-transfers, the principal may stand to benefit by allowing supervisor-agent collusion. This benefit may even prompt the principal to actively encourage collusion by hiring a dishonest supervisor in strict preference over an honest supervisor. (c) 2006 Elsevier B.V. All rights reserved.