Relational Contracts and Corruption

Abstract: This article explores the links between socially beneficial relational contracts and corruption. The model considers a context where responsibility for a relational contract is delegated to a supervisor who cares in part about the total profit the relationship generates, and in part about side-payments which they receive from the agent. An agent can both exert effort that is beneficial to society and make corrupt side-payments to the supervisor, the incentives for both come through self-enforcing contracts. We show that, under certain conditions, delegation to a such a supervisor may enhance the likelihood that a socially beneficial relational contract is sustainable. Moreover, the model allows us to consider the dynamic paths of bribes. We find that the link between corruption and agent performance is non-monotonic. Initially, corruption increases when the agent performs well, but after a certain time the relationship is either terminated or bribes are lowered as an incentive for the agent to induce effort.