Lahore School of Economics

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Corruption, Tax Evasion and the Role of Wage Incentives with Endogenous Monitoring Technology

Offering public wage premium without deterring corruption is sub-optimal and the government can be better of either eliminating corruption by offering efficiency wages or accepting corruption by offering wages below the market wage, suggests the recent paper published in Economic Inquiry by Dr. Waqar Ahmed Wadho of Lahore School of Economics. Here is an 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.

The paper can be accessed here

About the Author: Dr. Waqar Ahmed Wadho is Assistant Professor of Economics and Senior Research Fellow at Center for Research in Economics and Business (CREB), Lahore School of Economics.

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posted by S A J Shirazi @ 9/22/2015 10:17:00 AM,

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