IV. Factors Behind Differential - 2

The idea of multiple equilibria in the
incidence of corruption is salient in
some of the recent economic theorists’
explanations. The basic idea is that corruption
represents an example of what
are called frequency-dependent equilibria,
and our expected gain from corruption
depends crucially on the number of
other people we expect to be corrupt.
At a very simple level the idea may be
illustrated, as in Andvig (1991), with a

so-called Schelling diagram shown in
Figure 1. The distance between the origin
and any point on the horizontal axis
represents the proportion of a given total
number of officials (or transactions)
that is known to be corrupt, so that the
point of origin is when no one is corrupt,
and the end-point n is when everyone
is corrupt. The curves M and N represent
the marginal benefit for a
corrupt and an honest official respectively
for all different allocations of the
remaining officials in the two categories.
The way the curve N is drawn, the
benefit of an honest official is higher
than that of a corrupt official when very
few officials are corrupt, but it declines
as the proportion of corrupt officials
increases and ultimately becomes even
negative when almost all others are
corrupt. The M curve goes up at the
beginning when more and more officials
are corrupt (for the marginal
corrupt official lower reputation loss
when detected, lower chance of detection,
lower search cost in finding a
briber, etc.), but ultimately declines
(when the size of bribe is bid down by
too many competing bribers, for example),
even though at the end-pont the
pay-off for a corrupt official remains
positive.
In Figure 1 there are three equilibrium
points, A, B, and C. A and C are
stable, but B is not. At point A all are
honest and it does not pay to be corrupt.
At C all are corrupt, and it does
not pay to be honest. At B, any given
official is indifferent (between being
corrupt and honest) but if only one
more official is corrupt it pays to become
corrupt; on the other hand, if one
fewer is corrupt, the marginal official
will choose to be honest. So initial conditions
are important: if the economy
starts with (or gets jolted into) a high
average level of corruption it will move
toward the high-corruption stable equilibrium
C; if the initial average corruption
is low, the economy gravitates toward
the honest equilibrium A. The diagram
illustrates in an elementary way
how two otherwise similar countries
(both in socio-economic structures and
in moral attitudes) may end up with two
very different equilibrium levels of corruption;
also, how small changes may
have a large impact on corruption if one
starts out at points close to B.