Endogenous Institutions and the Dynamics of Corruption

While empirical studies which analyze large cross section country data find that corruption lowers investment and thereby economic growth, this result cannot be established for certain subsamples of countries. We argue that one reason for these mixed findings may be that a country's corruption and growth rates are tightly linked as variables of a dynamic process which can have several equilibria or have different sets of equilibria. In order to understand the circumstances in which a country converges towards a certain equilibrium, we model the individual decisions to invest and corrupt as an evolutionary game. In this model the quality of government institutions is an endogenous variable, depending on the corruption rate, the population income, and the type of institutions; the quality of institutions itself then determines the future incentives to corrupt. The comprehension of these feedback effects allows us to study the role of the type of institutions for the dynamics of corruption. We present the equilibria for different types of institutions and discuss the resulting dynamics. The results suggest that cross country studies may significantly underestimate the impact of corruption on growth for certain countries. Depending on how the quality of institutions depends on corruption and income, corruption can either lower growth, suppress it entirely, or be positively correlated with growth in some special situationsCorruption; Institutions; Feedback Effects; Evolutionary Game

Replicator Dynamics with Frequency Dependent Stage Games

We analyze evolutionary games with replicator dynamics that have frequency dependent stage games. In such an evolutionary game, the payoffs of a strategy at any point in time are functions of the strategy shares given by the players' strategy choices at that time. This framework is suited to model feedback effects between population variables and individual incentives, indirect network effects, and behavior under social norms. We show that the replicator dynamics with frequency dependent stage games is well behaved, i.e. has unique solutions and is simplex invariant for all initial strategy states. Moreover, we present an extension of Liapunov's Theorem that facilitates the analysis of evolutionary equilibria for frequency dependent evolutionary gamesReplicator Dynamics; Frequency Dependent; State Dependent; Evolutionary Games; Liapunov

Replicator Dynamics with Frequency Dependent Stage Games

We analyze evolutionary games with replicator dynamics that have frequency dependent stage games. In such an evolutionary game, the payoffs of a strategy at any point in time are functions of the strategy shares given by the players strategy choices at that time. This framework is suited to model feedback effects between population variables and individual incentives, indirect network effects, and behavior under social norms. We show that the replicator dynamics with frequency dependent stage games is well behaved, i.e. has unique solutions and is simplex invariant for all initial strategy states. Moreover, we present an extension of Liapunov’s Theorem that facilitates the analysis of evolutionary equilibria for frequency dependent evolutionary games

Learning, voting and the information trap

We consider a median voter model with uncertainty about how the economy functions. The distribution of income is exogenously given and the provision of a public good is financed through a proportional tax. Voters and politicians do not know the true production function for the public good, but by using Bayes rule they can learn from experience. We show that the economy may converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap.Learning; voting and the information trap

Endogenous Institutions and the Dynamics of Corruption

While empirical studies which analyze large cross section country data find that corruption lowers investment and thereby economic growth, this result cannot be established for certain subsamples of countries. We argue that one reason for these mixed findings may be that a country’s corruption and growth rates are tightly linked as variables of a dynamic process which can have several equilibria or have different sets of equilibria. In order to understand the circumstances in which a country converges towards a certain equilibrium, we model the individual decisions to invest and corrupt as an evolutionary game. In this model the quality of government institutions is an endogenous variable, depending on the corruption rate, the population income, and the type of institutions; the quality of institutions itself then determines the future incentives to corrupt. The comprehension of these feedback effects allows us to study the role of the type of institutions for the dynamics of corruption. We present the equilibria for different types of institutions and discuss the resulting dynamics. The results suggest that cross country studies may significantly underestimate the impact of corruption on growth for certain countries. Depending on how the quality of institutions depends on corruption and income, corruption can either lower growth, suppress it entirely, or be positively correlated with growth in some special situations

Learning, voting and the information trap

We consider a median voter model with uncertainty about how the economy functions. The distribution of income is exogenously given and the provision of a public good is financed through a proportional tax. Voters and politicians do not know the true production function for the public good, but by using Bayes rule they can learn from experience. We show that the economy may converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap

On cheating, doping and whistleblowing

We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents` behavior. This inspection game has a unique Bayesian equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. We show that our whistleblowing mechanism reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are sufficiently large. (C) 2008 Elsevier B.V. All rights reserved

Heterogeneity, Local Information, and Global Interaction

Consider a society where all agents initially play "fair" and one agent invents a "cheating" strategy such as doping in sports. Which factors determine the success of the new cheating strategy? In order to study this question we consider an evolutionary game with heterogenous agents who can either play fair or cheat. We model heterogeneity by assuming that the players are either high or low types. Three factors determine the imitation dynamics of the model: the location and the type of the innovator, the distribution of types, and the information available to the agents. In particular we find that the economy is more likely to end up in a state where all agents cheat if the innovator is of low type or when the agents are maximally segregated.Evolutionary game theory, imitation dynamics, heterogeneity, local information, global interaction.

On cheating, doping and whistleblowing

We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents' behavior. This inspection game has a unique Bayesian equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. We show that our whistleblowing mechanism reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are sufficiently large.

Learning, public good provision, and the information trap

We consider an economy with uncertainty about the true production function for a public good. By using Bayes rule the economy can learn from experience. We show that it may learn the truth, but that it may also converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap. We also show that our results are robust with respect to small experimentation.