A Dynamic Analysis of Schelling’s Binary Corruption Model: A Competitive Equilibrium Approach

A Dynamic Analysis of Schelling’s Binary Corruption Model: A Competitive Equilibrium Approach

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Article ID: iaor2014754
Volume: 161
Issue: 2
Start Page Number: 608
End Page Number: 625
Publication Date: May 2014
Journal: Journal of Optimization Theory and Applications
Authors: , , , , , , ,
Keywords: social, game theory
Abstract:

Schelling (1978) suggested a simple binary choice model to explain the variation of corruption levels across societies. His basic idea was that the expected profitability of engaging in corruption depends on its prevalence. The key result of the so-called Schelling diagram is the existence of multiple equilibria and a tipping point. The present paper puts Schelling’s essentially static approach into an intertemporal setting. We show how the existence of an unstable interior steady state leads to thresholds such that history alone or history in addition to expectations (or coordination) is necessary to determine the long-run outcome. In contrast to the related literature, which classifies these two cases according to whether the unstable equilibrium is a node or a focus, the actual differentiation is more subtle because even a node can lead to an overlap of solution paths such that the initial conditions alone are insufficient to uniquely determine the competitive equilibrium. Another insight is that a (transiently) cycling competitive equilibrium can dominate the direct and monotonic route to a steady state, even if the direct route is feasible.

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