The environment and corruption: monetary vs. non-monetary incentives and the first best

This paper analyses environmental regulation under corruption and explores the possibility to attain the first best – ‘no corruption and no pollution’, with a special focus on implications of non-monetary incentives for firms to adapt green technology. It first demonstrates that (a) the effect of corruption control policies on the environment is not always positive, and (b) stricter environmental regulation intensifies the problem of corruption – implying a trade-off between environmental protection and corruption control. Next, it characterizes the ‘minimum environmental regulation’, involving least-subsidy to green technology seller and minimum-tax on brown production, which implements the first best outcome in the equilibrium. Interestingly, by allowing for firm heterogeneity in terms of preferences for social reputation, it demonstrates that introduction of non-monetary incentives in a corrupt environment increases the burden on the government’s exchequer, unlike as in absence of corruption possibilities. These results are robust, regardless of (a) whether corrupt transaction is initiated by bribee or briber and (b) whether bribe rate is exogenous or endogenous.