The role of externalities in determining the average level of corruption in the production process

A model of corruption in the production process is built which is aimed at studying the problem of choosing the optimal scheme of punishment, taking into account the structure of given production relations, as well as the fixed budget assumption. Stable equilibria of the model are characterized, and the mechanism of a bureaucrat's decision-making process is described. The crucial role of strategic interactions among bureaucrats is emphasized. Then, the model is used to examine punishment schemes: to what degree should punishment schemes depend on the deviation from the verage level of corruption by a given agent. Normally, it is better for a policymaker to have a scheme which reacts sharply to the deviations.