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Reforming an Institutional Culture of Corruption:
A Model of Motivated Agents and Collective Reputation
Justin Valasek
-WZ...
Motivation
“There are three kinds of [nonmaterial] rewards: a sense of duty and
purpose, the status that derives from indi...
Motivation
“There are three kinds of [nonmaterial] rewards: a sense of duty and
purpose, the status that derives from indi...
Motivation
“There are three kinds of [nonmaterial] rewards: a sense of duty and
purpose, the status that derives from indi...
Motivation
“There are three kinds of [nonmaterial] rewards: a sense of duty and
purpose, the status that derives from indi...
Motivation II
Public sector often more prosocial in developed nations, often
with wages below private sector.
Gregg et al....
Motivation II
Public sector often more prosocial in developed nations, often
with wages below private sector.
Gregg et al....
Motivation II
Public sector often more prosocial in developed nations, often
with wages below private sector.
Gregg et al....
Motivation II
Public sector often more prosocial in developed nations, often
with wages below private sector.
Gregg et al....
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Justin Valasek (WZB) Reforming Institutional Cul...
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Motivated workers more productive in mission-ori...
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Motivated workers more productive in mission-ori...
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Motivated workers more productive in mission-ori...
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Motivated workers more productive in mission-ori...
Outline of Approach
Analyze worker selection into institutions/firms A, B.
Motivated workers more productive in mission-ori...
Results Preview
Positive Question: Characterization of equilibria [Static].
Multiple equilibria (high/low motivation).
Jus...
Results Preview
Positive Question: Characterization of equilibria [Static].
Multiple equilibria (high/low motivation).
Com...
Results Preview
Positive Question: Characterization of equilibria [Static].
Multiple equilibria (high/low motivation).
Com...
Results Preview
Positive Question: Characterization of equilibria [Static].
Multiple equilibria (high/low motivation).
Com...
Results Preview
Positive Question: Characterization of equilibria [Static].
Multiple equilibria (high/low motivation).
Com...
Literature Review
Monetary incentives affect non-monetary incentives:
Titmuss (1970), Gneezy-Rustichini (2000), B´enebou-Ti...
Framework: Agents
Two institutions: A and B.
A: collective reputation and motivation relevant.
B: outside option.
Continuu...
Framework: Payoffs Institutions
Institution B: πj = xi − wi.
Market fully competitive: wB
i = xi.
Institution A, demand mea...
Framework: Payoffs Individuals
Non-motivated workers: U(wi, pi) = wi.
Motivated workers, conditional on working for A:
1 Ma...
Framework: Employment
Employment in B always available → wi = xi “outside option.”
Employment in A capped at ν.
Worker i c...
Framework: Equilibrium + Preliminaries
Definition (Equilibrium, Nash)
An equilibrium is defined given wA
, by {ˆpi} such tha...
Framework: Equilibrium + Preliminaries
Definition (Equilibrium, Nash)
An equilibrium is defined given wA
, by {ˆpi} such tha...
Framework: Equilibrium + Preliminaries
Definition (Equilibrium, Nash)
An equilibrium is defined given wA
, by {ˆpi} such tha...
Existence of High/Low Equilibria
Proposition (Existence of Market-Clearing Equilibria)
1 Generic Firm (v(λ) = 0):
Low-moti...
Example: Mission-Oriented (v(λ) > 0)
Ua pi 0
Ua pi 1
xb
wA
0.2 0.4 0.6 0.8 1.0
xa
0.0
0.2
0.4
0.6
0.8
1.0
Ua wi, xa
, C xa...
Dynamic Model: Transitioning between Equilibria
Dynamic Model: infinitely repeated version of static model.
Paper: Measure ...
Dynamic Model: Transitioning between Equilibria
Dynamic Model: infinitely repeated version of static model.
Paper: Measure ...
Dynamic Model: Transitioning between Equilibria
Dynamic Model: infinitely repeated version of static model.
Paper: Measure ...
Ct as a function of wA
t
Lemma (Crowding out/in motivation)
1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA
t ...
Ct as a function of wA
t
Lemma (Crowding out/in motivation)
1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA
t ...
Ct as a function of wA
t
Lemma (Crowding out/in motivation)
1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA
t ...
Ct as a function of wA
t
Lemma (Crowding out/in motivation)
1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA
t ...
Existence & Characterization Transition
Proposition (Existence of Transition)
Given δ = 1, a wage path that transitions fr...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Justin Valasek (WZB) Reforming Institutional Cul...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
Just...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Transition path {wA
0 , C0} ⇒ {wp∗
, C∗
}
v(λ) > 0; starting from C0 < λ.
Period 1: Set high wage (wA
1 + v(C0) = x).
All ...
Visual
wt
p
1 Ct
0 2 4 6 8 10
t
Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
Example: No transition path C0 ⇒ {wA∗
, C∗
}
v(λ) = 0; starting from C0 < λ.
Period 1: Set high wage.
C1 ≤ λ.
Period 2: v(...
Optimal Transition: How big of a wage increase?
Proposition (Minimum Budget)
The following wage path minimizes the maximum...
Minimum Budget
xb
0.2 0.4 0.6 0.8 1.0
xa
0.0
0.2
0.4
0.6
0.8
1.0
u wa , xa
Justin Valasek (WZB) Reforming Institutional Cu...
Exploiting Correlation Ability and Motivation
Two public-sector ability types yn
∈ {yl
, yh
}: yh
greater
average motivati...
Exploiting Correlation Ability and Motivation
Two public-sector ability types yn
∈ {yl
, yh
}: yh
greater
average motivati...
Exploiting Correlation Ability and Motivation
Two public-sector ability types yn
∈ {yl
, yh
}: yh
greater
average motivati...
Exploiting Correlation Ability and Motivation
Two public-sector ability types yn
∈ {yl
, yh
}: yh
greater
average motivati...
Conclusion
Mechanism for transforming an institution’s reputation through
the selection: Transition is likely a long-term ...
Conclusion
Mechanism for transforming an institution’s reputation through
the selection: Transition is likely a long-term ...
Conclusion
Mechanism for transforming an institution’s reputation through
the selection: Transition is likely a long-term ...
Takeaways
Thanks!
Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20
Bounding the analysis: Robustness
Institutional norms: Complementary to changing institutional
norms.
Direct effect wages o...
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Reforming an Institutional Culture of Corruption: A Model of Motivated Agents and Collective Reputation

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Presentation by Justin Valasek "Reforming an Institutional Culture of Corruption: A Model of Motivated Agents and Collective Reputation" at the SITE Corruption Conference, 31 August 2015.

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Reforming an Institutional Culture of Corruption: A Model of Motivated Agents and Collective Reputation

  1. 1. Reforming an Institutional Culture of Corruption: A Model of Motivated Agents and Collective Reputation Justin Valasek -WZB Berlin, CESifo- SITE Conference: Fighting Corruption in Developing and Transition Countries August 31, 2015 Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 1 / 20
  2. 2. Motivation “There are three kinds of [nonmaterial] rewards: a sense of duty and purpose, the status that derives from individual recognition and personal power, and the associational benefits that come from being part of an organization...that is highly regarded by its members or by society at large.” ∼ Wilson (1989) “Bureaucracy” Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 2 / 20
  3. 3. Motivation “There are three kinds of [nonmaterial] rewards: a sense of duty and purpose, the status that derives from individual recognition and personal power, and the associational benefits that come from being part of an organization...that is highly regarded by its members or by society at large.” ∼ Wilson (1989) “Bureaucracy” Some agents motivated by the mission of a public institution. Handy-Katz (1998), Francois (2000), Besley-Ghatak (2005). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 2 / 20
  4. 4. Motivation “There are three kinds of [nonmaterial] rewards: a sense of duty and purpose, the status that derives from individual recognition and personal power, and the associational benefits that come from being part of an organization...that is highly regarded by its members or by society at large.” ∼ Wilson (1989) “Bureaucracy” Some agents motivated by the mission of a public institution. Handy-Katz (1998), Francois (2000), Besley-Ghatak (2005). “Public Sector Efficiency Wage:” Below-market wage → disproportionately select motivated. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 2 / 20
  5. 5. Motivation “There are three kinds of [nonmaterial] rewards: a sense of duty and purpose, the status that derives from individual recognition and personal power, and the associational benefits that come from being part of an organization...that is highly regarded by its members or by society at large.” ∼ Wilson (1989) “Bureaucracy” Some agents motivated by the mission of a public institution. Handy-Katz (1998), Francois (2000), Besley-Ghatak (2005). “Public Sector Efficiency Wage:” Below-market wage → disproportionately select motivated. (Contrasts with corruption “efficiency wage” (Besley-McLaren (1993)).) Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 2 / 20
  6. 6. Motivation II Public sector often more prosocial in developed nations, often with wages below private sector. Gregg et al. (2011), Dur and Zoutenbier (2012), etc. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 3 / 20
  7. 7. Motivation II Public sector often more prosocial in developed nations, often with wages below private sector. Gregg et al. (2011), Dur and Zoutenbier (2012), etc. India, Indonesia: Preference for public sector → less prosocial. Hanna and Wang (2014), Banuri and Keefer (2014). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 3 / 20
  8. 8. Motivation II Public sector often more prosocial in developed nations, often with wages below private sector. Gregg et al. (2011), Dur and Zoutenbier (2012), etc. India, Indonesia: Preference for public sector → less prosocial. Hanna and Wang (2014), Banuri and Keefer (2014). Mexico: Higher wage has (+) effect on motivation. Dal Bo et al. (2013). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 3 / 20
  9. 9. Motivation II Public sector often more prosocial in developed nations, often with wages below private sector. Gregg et al. (2011), Dur and Zoutenbier (2012), etc. India, Indonesia: Preference for public sector → less prosocial. Hanna and Wang (2014), Banuri and Keefer (2014). Mexico: Higher wage has (+) effect on motivation. Dal Bo et al. (2013). This paper adds: “the associational benefits that come from being part of an organization...that is highly regarded by its members or by society at large.” Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 3 / 20
  10. 10. Outline of Approach Analyze worker selection into institutions/firms A, B. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  11. 11. Outline of Approach Analyze worker selection into institutions/firms A, B. Motivated workers more productive in mission-oriented institution A (no corruption). [Besley-Ghatak] Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  12. 12. Outline of Approach Analyze worker selection into institutions/firms A, B. Motivated workers more productive in mission-oriented institution A (no corruption). [Besley-Ghatak] Motivated workers value collective reputation: (+) if high reputation, (−) if low reputation. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  13. 13. Outline of Approach Analyze worker selection into institutions/firms A, B. Motivated workers more productive in mission-oriented institution A (no corruption). [Besley-Ghatak] Motivated workers value collective reputation: (+) if high reputation, (−) if low reputation. 1 Prosocial signaling (B´enebou-Tirole 2006). 2 Identity (Akerlof and Kranton 2000, 2005). 3 Value-homophily (Lazarsfeld and Merton 1954). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  14. 14. Outline of Approach Analyze worker selection into institutions/firms A, B. Motivated workers more productive in mission-oriented institution A (no corruption). [Besley-Ghatak] Motivated workers value collective reputation: (+) if high reputation, (−) if low reputation. 1 Prosocial signaling (B´enebou-Tirole 2006). 2 Identity (Akerlof and Kranton 2000, 2005). 3 Value-homophily (Lazarsfeld and Merton 1954). (1) Show that model can organize the empirical data: developed/developing. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  15. 15. Outline of Approach Analyze worker selection into institutions/firms A, B. Motivated workers more productive in mission-oriented institution A (no corruption). [Besley-Ghatak] Motivated workers value collective reputation: (+) if high reputation, (−) if low reputation. 1 Prosocial signaling (B´enebou-Tirole 2006). 2 Identity (Akerlof and Kranton 2000, 2005). 3 Value-homophily (Lazarsfeld and Merton 1954). (1) Show that model can organize the empirical data: developed/developing. (2) Implications of the model for reform (wage, not laws). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 4 / 20
  16. 16. Results Preview Positive Question: Characterization of equilibria [Static]. Multiple equilibria (high/low motivation). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 5 / 20
  17. 17. Results Preview Positive Question: Characterization of equilibria [Static]. Multiple equilibria (high/low motivation). Comparative statics motivation-wage: High-motivation reputation: ↑ wage crowds out motivation. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 5 / 20
  18. 18. Results Preview Positive Question: Characterization of equilibria [Static]. Multiple equilibria (high/low motivation). Comparative statics motivation-wage: High-motivation reputation: ↑ wage crowds out motivation. Low-motivation reputation: ↑ wage crowds in motivation. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 5 / 20
  19. 19. Results Preview Positive Question: Characterization of equilibria [Static]. Multiple equilibria (high/low motivation). Comparative statics motivation-wage: High-motivation reputation: ↑ wage crowds out motivation. Low-motivation reputation: ↑ wage crowds in motivation. Normative Question: Can wage be used as policy tool to transition from high to low corruption? Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 5 / 20
  20. 20. Results Preview Positive Question: Characterization of equilibria [Static]. Multiple equilibria (high/low motivation). Comparative statics motivation-wage: High-motivation reputation: ↑ wage crowds out motivation. Low-motivation reputation: ↑ wage crowds in motivation. Normative Question: Can wage be used as policy tool to transition from high to low corruption? Non-monotonic dynamic transition: 1 Increase wage – attract motivated ⇒ 2 Gradual decrease wage – “push” non-motivated types out.* Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 5 / 20
  21. 21. Literature Review Monetary incentives affect non-monetary incentives: Titmuss (1970), Gneezy-Rustichini (2000), B´enebou-Tirole (2003, 2006), Besley-Ghatak (2005). Intrinsic incentives in the workplace: Workplace norms: Dewatripont et al. (1999), Akerlof and Kranton (2005), Dixit (2002), Murdock (2002), Sliwka (2007), Ellingsen and Johannesson (2008), Prendergast (2008); Bandiera et al. (2010). Worker motivation and selection: Handy-Katz (1998), Francois (2000), Casellia-Morelli (2004), Besley-Ghatak (2005), Prendergast (2007), Delfgaauw-Dur (2008), Macchiavello (2008), Auriol-Brilion (2014), Aldashev et al. (2015). Dynamic reform of institutions: Tirole (1996), Bisin-Verdier (2001), Bidner-Francois (2013), Acemoglu-Jackson (2014, 2015). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 6 / 20
  22. 22. Framework: Agents Two institutions: A and B. A: collective reputation and motivation relevant. B: outside option. Continuum of workers of measure 1, index set I. λ motivated; (ai = 1). (1 − λ) non-motivated; (ai = 0). Employed in A (pi = 1), or in B (pi = 0). Workers have heterogeneous private-sector ability. Ability in B, xi ∼ U[x, x]. Independence, f(xi|ai) = f(xi). Ability in A homogenous. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 7 / 20
  23. 23. Framework: Payoffs Institutions Institution B: πj = xi − wi. Market fully competitive: wB i = xi. Institution A, demand measure ν < 1: πj = πp + βai − wi ai unobservable. Aggregate output observed → C = I piai/ I pi observed. wA i = wA. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 8 / 20
  24. 24. Framework: Payoffs Individuals Non-motivated workers: U(wi, pi) = wi. Motivated workers, conditional on working for A: 1 May value mission of A. 2 Value the collective reputation of A. Ua(wi, pi, C) = wi + v(C)pi, v (·) > 0, v (·) < 0. Generic firm v(λ) = 0; Mission-oriented institution v(λ) > 0. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 9 / 20
  25. 25. Framework: Employment Employment in B always available → wi = xi “outside option.” Employment in A capped at ν. Worker i chooses ˆpi ∈ {0, 1}. pi,t = 0 if ˆpi = 0 = 1 w.p. q if ˆpi = 1, q = min 1, ν I ˆpi . Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 10 / 20
  26. 26. Framework: Equilibrium + Preliminaries Definition (Equilibrium, Nash) An equilibrium is defined given wA , by {ˆpi} such that {ˆpi} maximizes worker utilities, given C = I ˆpiai/ I ˆpi. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 11 / 20
  27. 27. Framework: Equilibrium + Preliminaries Definition (Equilibrium, Nash) An equilibrium is defined given wA , by {ˆpi} such that {ˆpi} maximizes worker utilities, given C = I ˆpiai/ I ˆpi. Lemma (Cutoff Equilibrium) Given wA , equilibrium is characterized by {xa , xb }, where motivated workers choose public sector iff xi ≤ xa , non-motivated iff xi ≤ xb . Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 11 / 20
  28. 28. Framework: Equilibrium + Preliminaries Definition (Equilibrium, Nash) An equilibrium is defined given wA , by {ˆpi} such that {ˆpi} maximizes worker utilities, given C = I ˆpiai/ I ˆpi. Lemma (Cutoff Equilibrium) Given wA , equilibrium is characterized by {xa , xb }, where motivated workers choose public sector iff xi ≤ xa , non-motivated iff xi ≤ xb . Definition (Reputation Motivated/Non-Motivated) Reputation is Motivated if C > λ and Non-Motivated if C ≤ λ. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 11 / 20
  29. 29. Existence of High/Low Equilibria Proposition (Existence of Market-Clearing Equilibria) 1 Generic Firm (v(λ) = 0): Low-motivation equilibrium exists. High-motivation equilibrium exists if ν < λ(x + v(1)). 2 Mission-Oriented (v(λ) > 0): High-motivation equilibrium exists. Low-motivation equilibrium exists if ν < (λ − 1)(x + v(0)). Both High and Low Reputation equilibria exist when: 1 ν small. 2 −v(0), v(1) large. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 12 / 20
  30. 30. Example: Mission-Oriented (v(λ) > 0) Ua pi 0 Ua pi 1 xb wA 0.2 0.4 0.6 0.8 1.0 xa 0.0 0.2 0.4 0.6 0.8 1.0 Ua wi, xa , C xa Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 12 / 20
  31. 31. Dynamic Model: Transitioning between Equilibria Dynamic Model: infinitely repeated version of static model. Paper: Measure δ ∈ (0, 1] workers randomly “replaced” per period, binding tenure. Presentation: All workers replaced each period (δ = 1). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 13 / 20
  32. 32. Dynamic Model: Transitioning between Equilibria Dynamic Model: infinitely repeated version of static model. Paper: Measure δ ∈ (0, 1] workers randomly “replaced” per period, binding tenure. Presentation: All workers replaced each period (δ = 1). Friction: Motivated workers lagged reputation: Ua,t(wi, Ct−1) = wi,t + v(Ct−1)pi,t Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 13 / 20
  33. 33. Dynamic Model: Transitioning between Equilibria Dynamic Model: infinitely repeated version of static model. Paper: Measure δ ∈ (0, 1] workers randomly “replaced” per period, binding tenure. Presentation: All workers replaced each period (δ = 1). Friction: Motivated workers lagged reputation: Ua,t(wi, Ct−1) = wi,t + v(Ct−1)pi,t Question: Given initial low reputation, does a wage path exist that transitions to high reputation steady state equilibrium {wA∗ , C∗ }? Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 13 / 20
  34. 34. Ct as a function of wA t Lemma (Crowding out/in motivation) 1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA t . 2 If high reputation (v(Ct−1) > 0), then Ct decreasing in wA t . Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 14 / 20
  35. 35. Ct as a function of wA t Lemma (Crowding out/in motivation) 1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA t . 2 If high reputation (v(Ct−1) > 0), then Ct decreasing in wA t . Linear distance xa t , xb t fixed by v(Ct−1). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 14 / 20
  36. 36. Ct as a function of wA t Lemma (Crowding out/in motivation) 1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA t . 2 If high reputation (v(Ct−1) > 0), then Ct decreasing in wA t . Linear distance xa t , xb t fixed by v(Ct−1). (1) Low wage: (1) High wage: Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 14 / 20
  37. 37. Ct as a function of wA t Lemma (Crowding out/in motivation) 1 If low reputation (v(Ct−1) ≤ 0), then Ct increasing in wA t . 2 If high reputation (v(Ct−1) > 0), then Ct decreasing in wA t . Linear distance xa t , xb t fixed by v(Ct−1). (2) Low wage: (2) High wage: Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 14 / 20
  38. 38. Existence & Characterization Transition Proposition (Existence of Transition) Given δ = 1, a wage path that transitions from low reputation, v(C0) < 0, to high reputation steady-state, {wA∗ , C∗ }, exists iff v(λ) > 0. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 15 / 20
  39. 39. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  40. 40. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  41. 41. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  42. 42. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  43. 43. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  44. 44. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. C2 > λ. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  45. 45. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. C2 > λ. Period 3: Set market-clearing wage. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  46. 46. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. C2 > λ. Period 3: Set market-clearing wage. Since C2 > C1, wA 3 < wA 2 . Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  47. 47. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. C2 > λ. Period 3: Set market-clearing wage. Since C2 > C1, wA 3 < wA 2 . Ct decreasing in wage ⇒ C3 > C2. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  48. 48. Transition path {wA 0 , C0} ⇒ {wp∗ , C∗ } v(λ) > 0; starting from C0 < λ. Period 1: Set high wage (wA 1 + v(C0) = x). All workers apply: C1 = λ. Period 2: Set market-clearing wage (wA 2 solves I ˆpi = ν). Reputation payoff positive (v(C1 = λ) > 0) ⇒ xa > xb. C2 > λ. Period 3: Set market-clearing wage. Since C2 > C1, wA 3 < wA 2 . Ct decreasing in wage ⇒ C3 > C2. Period t: Set market-clearing wage.............{wA∗ , C∗ }. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  49. 49. Visual wt p 1 Ct 0 2 4 6 8 10 t Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 16 / 20
  50. 50. Example: No transition path C0 ⇒ {wA∗ , C∗ } v(λ) = 0; starting from C0 < λ. Period 1: Set high wage. C1 ≤ λ. Period 2: v(Ct−1) ≤ 0 ⇒ C2 is decreasing in wage. C2 ≤ λ for any wA 2 . v(λ) = 0, no {wA } exists that transitions C0 ⇒ {wA∗ , C∗ }. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 17 / 20
  51. 51. Optimal Transition: How big of a wage increase? Proposition (Minimum Budget) The following wage path minimizes the maximum budget required to transition from any C0 such that v(Ct−1) ≤ 0 to {wA∗ , C∗ }: wA t = x + v(0) for t s.t. v(Ct−1) ≤ 0 Market-Clearing for t ≥ min{t|v(Ct−1) > 0} Set wA 1 high enough lowest-ability motivated worker joins A. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 18 / 20
  52. 52. Minimum Budget xb 0.2 0.4 0.6 0.8 1.0 xa 0.0 0.2 0.4 0.6 0.8 1.0 u wa , xa Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 18 / 20
  53. 53. Exploiting Correlation Ability and Motivation Two public-sector ability types yn ∈ {yl , yh }: yh greater average motivation. Value average reputation → transition if v(¯λ) ≥ 0. Improve reputation through disproportionate hiring of h type. Hire only yh (high wage) until C > ¯λ → market-clearing wage. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 19 / 20
  54. 54. Exploiting Correlation Ability and Motivation Two public-sector ability types yn ∈ {yl , yh }: yh greater average motivation. Value average reputation → transition if v(¯λ) ≥ 0. Improve reputation through disproportionate hiring of h type. Hire only yh (high wage) until C > ¯λ → market-clearing wage. Corruption reform through creating “elite” units: 1 Screen ability-type with high average motivation. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 19 / 20
  55. 55. Exploiting Correlation Ability and Motivation Two public-sector ability types yn ∈ {yl , yh }: yh greater average motivation. Value average reputation → transition if v(¯λ) ≥ 0. Improve reputation through disproportionate hiring of h type. Hire only yh (high wage) until C > ¯λ → market-clearing wage. Corruption reform through creating “elite” units: 1 Screen ability-type with high average motivation. Poor reputation → problem of adverse selection. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 19 / 20
  56. 56. Exploiting Correlation Ability and Motivation Two public-sector ability types yn ∈ {yl , yh }: yh greater average motivation. Value average reputation → transition if v(¯λ) ≥ 0. Improve reputation through disproportionate hiring of h type. Hire only yh (high wage) until C > ¯λ → market-clearing wage. Corruption reform through creating “elite” units: 1 Screen ability-type with high average motivation. Poor reputation → problem of adverse selection. 2 Couple screening with high wage to solve adverse-selection problem. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 19 / 20
  57. 57. Conclusion Mechanism for transforming an institution’s reputation through the selection: Transition is likely a long-term process. Complementary to changing institutional norms (conformity). Works even if wage change for new workers only. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20
  58. 58. Conclusion Mechanism for transforming an institution’s reputation through the selection: Transition is likely a long-term process. Complementary to changing institutional norms (conformity). Works even if wage change for new workers only. Initial point matters: starting from low reputation, higher wages crowd in motivation. High Corruption: higher wages decrease corruption directly (efficiency wage) and indirectly (selection). Caveat: Mechanism to assign over-demanded jobs minimally non-corrupt. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20
  59. 59. Conclusion Mechanism for transforming an institution’s reputation through the selection: Transition is likely a long-term process. Complementary to changing institutional norms (conformity). Works even if wage change for new workers only. Initial point matters: starting from low reputation, higher wages crowd in motivation. High Corruption: higher wages decrease corruption directly (efficiency wage) and indirectly (selection). Caveat: Mechanism to assign over-demanded jobs minimally non-corrupt. How to endow a new elite institution with a good reputation: high-motivation ability type + high wage to avoid adverse selection. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20
  60. 60. Takeaways Thanks! Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20
  61. 61. Bounding the analysis: Robustness Institutional norms: Complementary to changing institutional norms. Direct effect wages on behavior: Orthogonal to changing direct incentives for corrupt behavior. Transition through decreasing wages: Market-clearing wages for new workers. Over-demanded jobs auctioned off: need minimal amount of random allocation. Justin Valasek (WZB) Reforming Institutional Culture SITE: Fighting Corruption 20 / 20

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