Reforming an institutional culture of corruption : a model of motivated agents and collective reputation

Recent empirical studies suggest that poor public sector performance in developing nations is due in part to the difficultly of selecting workers whose motivation is aligned with the mission of the institution -- in direct contrast to evidence from developed nations, public sector workers tend to be less prosocial. Moreover, contrary to the public sector efficiency-wage argument, empirical evidence from developing countries suggests that motivation is weakly increasing in wages. This paper provides an account for this discrepancy between developed and developing nations by analyzing a model where motivated workers value the collective reputation of their institution, e.g. due to a prosocial signaling motive or identity concerns. The initial insight of the analysis is that there exists both a highreputation, low-wage equilibrium and a low-reputation, high-wage equilibrium. Importantly, the comparative statics of motivation and wage differ between the equilibria: starting from low-reputation, higher wages crowd in motivation, while starting from high-reputation, higher wages crowd out motivation. The paper also details the implications of this model for successful reform: taking reputation as the state variable, we show that a non-monotonic wage path is required to achieve a transition to the high-reputation equilibrium--an initial wage increase to crowd in motivated workers, followed by a wage decrease to crowd out nonmotivated workers.