The Environment and Corruption: Monetary vs. Non-monetary Incentives and the First Best

The type of the firm (green or brown) is not known to the government and so it hires bureaucrats to supervise the actions of the firms and report it. [...] 10 We assume that the common man cannot assess the probabilities of corrupt officials and the probability of the efficiency of the audit mechanism, i.e., they are naive and infer about the greenness of firms only on the basis of the certification, which remains their only source of information. [...] To illustrate it further, in the present scenario, if in Stage 3 the official demands bribe to a firm, the firm becomes certain that the official is corrupt (? = 0) and thus its incentive compatibility condition to accept the demand and pay bribe ? implies the following, regardless of whether the firm is green or brown. [...] Lemma 5(b) and Lemma 1 together implies that qualitative effects of introduction of non- monetary incentives on the ‘lowest-subsidy and minimum-tax’ policy required to achieve the first best outcome in the equilibrium in the case of bribee initiated corruption are the same as those in the case of briber-initiated corruption. [...] Proposition 7: (a) Implementation of the first best outcome in the equilibrium requires a higher green technology subsidy and a lower brown tax in the scenario in which corrupt transactions are initiated by bribee compared to those in the scenario of briber initiated corrupt transactions, unless the extra cost of green technology is less than a critical level.