Choosing Agents and Monitoring Consumption: A Note on Wealth as a Corruption‐Controlling Device

Abstract

There are a large number of cases where corruption has been discovered when investigating levels of consumption that appear to be hard to justify. The informativeness of an agent's level of consumption depends on his legal income and initial level of wealth, as conspicuous consumption by wealthy agents leads to little updating of the principal's belief about their honesty. This introduces a tendency to prefer poor agents as they are easier to monitor. More generally, we describe the basic problem of choosing agents and monitoring consumption with the aim of reducing corruption, and discuss features of the practical applications. Castrated slaves, called eunuchs, were employed by Sultans to guard their harems. This solution to a particularly distressing principal-agent problem is one instance of a general strategy that can be called 'choosing agents'. In this strategy, the principal selects an agent, to whom he is about to delegate a task, based on an observable characteristic. In the standard agency model it is clear that the agent's degree of risk aversion can be costly to the principal. Perhaps because of the difficulty in observing risk aversion, few economists have emphasised the potential benefits of using particular types of agents. An exception is Schelling (1960), who discusses the use of agents with a low personal cost of conflict and mentions the strategic advantages of delegating authority 'to a military commander of known motivation'. A subsequent paper by Vickers (1985) emphasises the potential value of hiring a manager who is committed to maximise the company's sales instead of profits. Similarly, Rogoff (1985) analyses the benefits of delegating the conduct of monetary policy to a conservative central banker in a setting where there is time inconsistency, while Rotemberg and Saloner (2000)