Corruption: Suppose there is an anti-pollution law. A firm that earns R in revenue faces cost C to comply with the law, or faces fine F if it does not comply. It can also offer a bribe B to the environmental regulator to avoid paying the fine. The regulator earns a salary S and can either take the bribe and ignore the law or enforce the law without taking the bribe. There is a probability P the regulator is fired if he ignores the law in which case he earns no salary. The regulator DOES NOT receive any share of the fine that they impose.
a. As P increases, is the regulator more or less inclined to enforce the law? Why (2-3 sentences)
b. If C > F , what is the firm’s best strategy (what will they choose to do: evade or comply?
c. What is the firm’s expected income if the firm complies with the law and the regulator enforces the law?
d. What is the regulator’s expected income if he accepts the bribe and ignores the firm’s non-compliance?
Sample Solution
