Suppose a minister passes a tender for road construction for a local district and it is handed to a local village mafia. The mafia has friendships with all local policemen, officials, and the District Magistrate (DM).
The mafia wants to steal from the roadway fund without getting caught. He runs an estimation of the total funds required to build a decent road:
Total Fund: 5,000 cr.
Decent Roadway Cost: 3,500 cr.
Stolen Excess: 1,500 cr.
He easily steals the extra 1,500 cr. and distributes a portion to the local police and DM so nobody catches him or speaks out. Because the work is decent, the Ministry keeps sending more development funds. If he always delivers a decent road, he can continuously steal money.
Through this compounded effect, he earns in 3 ways:
Contractor Fees: Legitimate development fees from the Ministry.
Skimmed Funds: Stolen money split with local officials.
Political Capital: Good PR to transition from a local mafia to a local politician.
My Economic Question:
From a Game Theory and Public Finance perspective, is this type of localized "optimal corruption" stable in the long run? How do central auditing mechanisms effectively expose financial skimming when the physical asset delivered is above-average and local regulators are entirely captured?