CORRUPTIBLE LAW ENFORCERS - HOW SHOULD THEY BE COMPENSATED

We study the optimal compensation policy for a corruptible inspector, charged with monitoring pollution from a factory. Our utilitarian appr oach focuses on the trade-off among corruption, pollution, and enforce ment effort. Owing to the strategic interaction between factory and in spector, changes in compensation policy have surprising effects, e.g., raising the penalty for corruption may cause pollution to increase. W e find that bribery is an inefficient way of encouraging the inspector to monitor; society should wipe out corruption.