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A Dynamic Approach to Managing Corruption: Exploring the Optimal Path of Over-Sight

Author: JASON K. HANSEN and ROBERT M. MCNAB
Published in PFM, Vol. 17 No. 1

Corruption lowers public sector productivity, crowds out private investment, reduces foreign direct investment, and negatively impacts a host of social outcomes. These outcomes suggest that the optimal level of corruption is zero, however, reducing corruption requires the commitment of scarce resources. A non-zero level of corruption may thus be acceptable in the face of tight budget constraints. The question that remains is whether there is an optimal level of corruption within public sector organizations and, if so, what necessary level of oversight achieves the optimum. This paper develops a dynamic model of a public sector organization to illustrate the benefits and costs of using managerial oversight to address corruption. We find that if public sector managers desire a reduction of corruption to the economic optimum, they must utilize proactive management with a high level of initial over-sight. Without an initial ‘shock’ in terms of increased oversight, managerial attempts to combat corruption may spur its increase.

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