ECONOMICS OF PUBLIC GOOD PROVISION: AUDITING, OUTSOURCING AND BRIBERY

Abstract. The paper investigates the choice of government to audit or outsource the provision of a public good in the presence of a potential hidden bribe and information asymmetries. An audit mechanism is developed for characterizing the provision of the public good in the public sector given asymmetric information about the cost of production between the bureau (i.e., producer) and the department (funding source). Outsourcing is represented by Nash bargaining between the government department and a monopoly rm over the price of the public good, including a hidden bribe. The study also relaxes the assumption of a single-tier government underlying the Samuelson rule. The key \u85ndings are as follows: For small scale economies, bribery is predicted to be aimed at having an outsourcing contract persist even when public sector provision of the public good dominates (based on welfare and unit costs measurements). On the other hand, bribery in large scale economies is predicted to be aimed at motivating outsourcing when the provision of the public good through public sector production is in the public interest. The \u85ndings also predict that a reduction in the departments corruptibility may result in increased prices as the \u85rm acts to induce the department to maintain its choice of outsourcing over the public interest for auditing when the rms bargaining power is su ¢ ciently low and the departments preference towards bribes is relatively high