An expected utility model is used to analyze the allocation decision of an incumbent politician in
dividing public funds between expenditures on public goods and pure rents. Comparative statics
analysis reveals that while the result for improvements in transparency is ambiguous in terms of
simultaneously improving public goods provision and reducing rent-extraction, fixing the
incentives scheme faced by the politician while in office yields unambiguously welfareincreasing
outcomes. As in any contract under unobservable effort, it is not practicable to insist
that the agent reveal his true effort level through increased transparency. Rather, the optimal
contract must specify proper incentives and a minimum contractible level of information that
accurately relates observed outcomes to the actual effort level exerted by the agent. The paper
concludes with empirical results from a panel data set of 115 cities in the Philippines for the years
1996-2000 supporting the predictions of the theoretical model.
