Institutionalized Corruption and Privilege in China's Socialist Market Economy: A General Equilibrium Analysis

This paper develops a general equilibrium model to consider the effects of corruption on economic welfare, the network size of division of labor and productivity. A Walrasian equilibrium in a market economy is firstly computed in which each person can choose his/her occupation freely. We then consider the effects on welfare when a privileged group is chosen to work as high-level administrators. Finally, we allow for explicit collusion between administrators through introducing an administrator's agent who acts in the interests of all the administrators by introducing an entrance fee, amounting to a bribe; while the price of the administrators' services is still determined by the supply and demand of a Walrasian market. The model shows that corruption increases the economic welfare of a privileged group in China consisting of high ranking officials and those closely connected to them at the expense of the general populace. While the model is developed in order to explain corruption in China, it is also potentially relevant to other countries with entrenched privileged groups