Signaling corruption through conspicuous consumption

Abstract

Public officers suspected of corruption are often seen consuming conspicuously luxury goods. Since this raises public awareness about them, it can backfire and lead to an investigation that eventually finds them guilty of corruption. One plausible explanation to rationalize this behavior is that, by signaling their willingness to be corrupt, they can attract the pool of corrupt firms and get higher bribes. In this work, we consider a public procurement setting where the government delegates a supervisor to run the process. If the signaling cost is low enough, then there exists a separating equilibrium where the supervisor signals his type and obtains a higher bribe. Even when the government fixes a budget constraint or maximum price before assigning a supervisor, a signaling equilibrium can still exist, but with a lower reserve price than socially optimal. Therefore, even though the government can reduce the bribe revenues, corruption and signaling can result in aggregate welfare loss.