Does a Salary Hike Reduce Corruption?

Since the empirical evidence about the relation between higher salary and corruption in a bureaucracy is ambiguous, the paper theoretically explores the relation between the two. It constructs a model where at the initial equilibrium both the honest and corrupt bureaucrats coexist and shows that the effect of a salary hike crucially depends on the preference pattern of the bureaucrats. The results underline the importance of including the fixed effects in any empirical analysis studying the relation between the two variables.