Economics of Public Good Provision: Auditing, Outsourcing, and Bribery

This study investigates a government's contracting decision to audit or outsource the provision of a public good given a potential hidden bribe and information asymmetries. The key findings are the following. First, the bribe and price of the public good are increasing in the corruptibility of the department. Second, the bribe is decreasing in the firm's bargaining power. Third, a bribery equilibrium exists when the department's corruptibility is sufficiently high given the firm's bargaining power. A bribe involves extortion or a compensatory payment depending on the department's corruptibility. Only a compensatory bribe affects the department's contracting decision.