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

Abstract. This paper develops a general equilibrium model to consider the effects of corruption caused by institutionalized privilege on economic welfare, the network size of division of labour and productivity. First a Walrasian equilibrium in a market economy is computed; then we 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 by introducing an administrator's agent who acts in the interests of all the administrators. The model shows that in equilibrium (fixed point) the degree of corruption, the degree of division of labour and productivity are interdependent.