Working Paper BETA #2019-25

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Title : Wheels and cycles: (sub)optimality and volatility of corrupted economies

Author(s) : Stefano BOSI, David DESMARCHELIER, Thai HA-HUY

Abstract : We consider a simple economy where production depends on labor supply and social capital. Networking increases the social capital ("greases the wheel") but also the corruption level ("sands the wheel"). Corruption is a negative productive externality. We compare the market economy, where the negative externality is not taken in account by individuals, with a centralized economy, where the planner internalizes the negative effect. We highlight the possible existence of cycles in the market economy and optimal cycles in the planned one. We compare the centralized and the decentralized solutions in the short and in the long run.

Key-words : Corruption, optimal cycles, Ramsey model.

JEL Classification : C61, E32.