Bureaucratic shirking and corruption are prevalent in developing countries. This paper presents a delegation model where a government authorizes an inspector to monitor a polluting firm. The inspector may shirk in monitoring and may accept bribery when discovering noncompliance. We distinguish between two types of environmentally friendly actions, emission abatement and investment to enhance abatement technology, and investigate how bureaucratic shirking and corruption affect firms’ incentives of taking these actions. A corruptible inspector exerts more effort in monitoring the firm (an effort-inducing effect) but fails to enforce environmental regulations when discovering noncompliance (a nonenforcement effect), compared to an (incorruptible) bureaucratic inspector. Moreover, the firm strategically makes more investment to reduce the corruptible inspector’s monitoring effort (a strategic effect on monitoring). We find that investment and abatement decrease when corruption becomes more widespread, only if the corruptible inspector has sufficiently small bargaining power. Moreover, the corruptible inspector’s higher bargaining power leads to higher investment and abatement.
Bibliographical noteWe thank the co-editor Michael Finus and two anonymous referees for constructive comments and suggestions. We also thank participants in the EAERE 2017 Annual Conference (Athens), Singapore Economic Review Conference 2017 and the 5th Annual Xiamen University International Workshop on Economic Analysis of Institutions and seminar participants in Nanyang Technological University for helpful comments.
- Bureaucratic shirking
- Emission abatement
- Technological investment