Income inequality, weak institutions, and the emergence of reform-abortive corruption

Abstract

We propose a statutory/norm approach for understanding the emergence of rent-seeking corruption using a 2×2 collective action game. In the status quo, self-interested players converge on a market-failure equilibrium, which is inferior to the cooperative outcome. The government attempts to shift behavior toward cooperation by enacting statutes that prohibit defection through penalties and enforcement mechanisms. The effectiveness of these interventions depends on sufficiently high expected penalties and low implementation costs, which are conditions characteristic of upright governance. When government is weak, however—particularly when it is vulnerable to bribes—statutes are undermined. Income inequality magnifies this vulnerability: elites benefit from the status quo and possess resources to finance bribes that dilute, reshape, or block reforms, while the poorer majority faces prohibitive monetary and electoral lobbying costs. This dynamic produces an Olsonian “tyranny of the minority,” in which a small but affluent group prevails over the numerically larger majority. As a result, the combination of weak institutions and high inequality impedes reforms that would otherwise enhance utilitarian welfare. Our analysis underscores how governance quality and income distribution jointly shape the effectiveness of statutory interventions, offering insight into why national reform initiatives often fail in contexts characterized by weak rule of law.

JEL classification: C72, D72