Corruption: A General Equilibrium Approach

Abstract

Most theoretical studies of corruption develop micro models of individual acts while empirical papers study corruption at the country level. We build an agent-based model to provide the missing link between these two groups. Here the societal corruption level is derived from individual corruption levels optimally chosen by agents with varying risk aversion and human capital. It, in turn, affects the risk-return profile of corruption for the individual agents. Simulating a multi-generational economy with heterogeneous agents we show that there are locally stable equilibrium corruption levels with certain socio-economic determinants. However there are situations when corruption can rise till it stifles all economic activity.