Dilip Mookherjee

Corruptible Law Enforcers: How Should They Be Compensated?

The authors study the optimal compensation policy for a corruptible inspector charged with monitoring pollution from a factory. Their utilitarian approach focuses on the trade-off among corruption, pollution, and enforcement effort. Owing to the strategic interaction between factory and inspector, changes in compensation policy have surprising effects, e.g., raising the penalty for corruption may cause pollution to increase. The authors find that bribery is an inefficient way of encouraging the inspector to monitor; society should wipe out corruption. Copyright 1995 by Royal Economic Society.

Optimal Incentive Schemes with Many Agents

The Grossman-Hart principal-agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting. Under the assumption that the principal chooses incentive schemes to implement agent actions as Nash equilibria, necessary and sufficient conditions are derived for the optimality of independent contracts, of rank-order tournaments, and for attainability of the first-best. In this context the relation of the principals welfare to the correlation between the underlying randomness in outputs of different agents is also investigated. Finally, some problems with the Nash equilibrium implementation assumption are discussed.

Decentralisation and Accountability in Infrastructure Delivery in Developing Countries

Many developing countries are experimenting with decentralisation of public service delivery to elected local governments instead of bureaucrats appointed by a central government. We study the resulting implications in a theoretical model in which the central government is uninformed about local need and unable to monitor service allocations. Bureaucrats charge bribes for services as monopoly providers, resulting in underprovision of services, especially for the poor. Local governments are directly responsive to their citizens needs but may be subject to capture by elites. Effects of decentralisation on service volumes, efficiency and equity are analysed under different financing arrangements for local governments.

Delegation as Commitment: The Case of Income Tax Audits

In this article we study the value of delegating authority over income tax audit policy, arising from the incompleteness of contracts. Consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy, as publicly verifiable information about detailed allocations of audit budgets is not available. We show that the welfare level associated with the full-commitment solution can be attained by delegating authority over audit policy to a manager. The latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable. In contrast, if the government retains authority, direct commitment to these same variables does not allow the full-commitment welfare level to be achieved. Thus, despite sharing a common informational basis, delegation may perform better than centralized arrangements in the presence of incomplete contracts.

Dominant Strategy Implementation of Bayesian incentive Compatible Allocation Rules

Abstract A large literature on incentive mechanisms represents incentive constraints by the requirement that truthful reporting be a Bayesian equilibrium. This paper identifies mechanism design problems for which there is no loss in replacing Bayesian incentive compatibility by the stronger requirement of dominant strategies. We identify contexts where it is possible to change the transfer payments of an optimal Bayesian mechanism so as to create dominant strategies and yet leave every participants expected utility unchanged. We also address the issue of multiple equilibria and unique implementation. Contexts where these results apply include auctions, bilateral bargaining, procurement contracting, and intrafirm resource allocation.

A theory of responsibility centers

Abstract We consider a principal-agent model to examine the effectiveness of responsibility centers, in particular cost or profit centers. We show that rather than contracting with each agent directly, the principal can create equally powerful incentives by setting up a responsibility center structure. The principal contracts with only the ‘manager’ of the center and delegates contracting with other agents and coordinating their activities. The principal then must monitor some measure of financial performance such as the centers cost of profit. We also find that responsibility centers dominate direct contracting with the agents when communication is limited.

Institutional Structure and the Logic of Ongoing Collective Action

Work by Axelrod, Hardin, and Taylor indicates that problems of repeated collective action may lessen if people use decentralized strategies of reciprocity to induce mutual cooperation. Hobbess centralized solution may thus be overrated. We investigate these issues by representing ongoing collective action as an n-person repeated prisoners dilemma. The results show that decentralized conditional cooperation can ease iterated collective action dilemmas—if all players perfectly monitor the relation between individual choices and group payoffs. Once monitoring uncertainty is introduced, such strategies degrade rapidly in value, and centrally administered selective incentives become relatively more valuable. Most importantly, we build on a suggestion of Herbert Simon by showing that a hierarchical structure, with reciprocity used in subunits and selective incentives centrally administered, combines the advantages of the decentralized and centralized solutions. This hierarchical form is more stable than the decentralized structure and often secures more cooperation than the centralized structure. Generally, the model shows that the logic of repeated decision making has significant implications for the institutional forms of collective action.

Inequality, Control Rights, and Rent Seeking: Sugar Cooperatives in Maharashtra

This paper presents a theory of rent seeking within farmer cooperatives in which inequality of asset ownership affects relative control rights of different groups of members. The two key assumptions are constraints on lump‐sum transfers from poorer members and disproportionate control rights wielded by wealthier members. Transfers of rents to the latter are achieved by depressing prices paid for inputs supplied by members and diverting resulting retained earnings. The theory predicts that increased heterogeneity of landholdings in the local area causes increased inefficiency by inducing a lower input price and a lower level of installed crushing capacity. Predictions concerning the effect of the distribution of local landownership on sugarcane price, capacity levels, and participation rates of different classes of farmers are confirmed by data from nearly 100 sugar cooperatives in the Indian state of Maharashtra over the period 1971–93.

Marginal Deterrence in Enforcement of Law

We characterize optimal enforcement in a setting in which individuals can select among various levels of some activity, all of which are monitored at the same rate but may be prosecuted and punished at varying rates. For less harmful acts, marginal expected penalties ought to fall short of marginal harms caused. Indeed, some range of very minor acts should be legalized. For more harmful acts, whether marginal expected penalties should fall short of, or exceed, marginal harms depends on the balance between monitoring and prosecution/punishment costs. We also explore how the optimal enforcement policy varies with changes in these costs.

The Distributive Impact of Privatization in Latin America: Evidence from Four Countries

This paper provides an overview of the results of a project that evaluates the distributive impact of privatization in four Latin America countries. The aim of the project was to estimate the effects of privatization on customers and workers, based on existing household and employment surveys. Four countries of varying size and per capita income were chosen for the study: two large, middle-income countries (Argentina and Mexico) and two small, poor countries (Bolivia and Nicaragua). This paper provides an overview of the methodology and results of the individual country papers, which contain further details concerning the privatization process and data sources used for each specific country. All four countries have undergone significant privatization since the late 1980s, and they have similar data sources that permit the application of a common methodology. The Nicaraguan case, however, was qualitatively different from the other three countries, in that large parts of the economy (including agriculture) were privatized as part of the transition from a socialist economy, while utilities that remained in the state sector throughout the 1990s were exposed to greater liberalization