Public Organization Review

, Volume 14, Issue 4, pp 545–559 | Cite as

A Second Best Theory of Institutional Quality

  • M. Cristina Molinari
Public Organiz Rev


This paper illustrates a theory of the second best where the constraints to the achievement of the optimum are of institutional nature. We consider the effects of corruption and bad governance on the public decision to privatize the provision of a service when contracts are incomplete and there is asymmetric information. We show that both corruption and bad governance are detrimental to welfare, but that removing only one of the two is not necessarily beneficial if the other is still present. The theory supplies a possible explanation to the controversial empirical evidence on the economic effects of corruption.


Corruption Governance Positive selection Privatization Second best 



I wish to thank M. LiCalzi and R. E. Buia for helpful comments.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of EconomicsUniversità Ca’ Foscari VeneziaVeniceItaly

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