Crony Capitalism, the Party-state, and Political Boundaries of Corruption

Abstract: What is the connection between crony capitalism, corruption, and the state apparatus in an autocracy? How much does corruption help the economy and when does it undermine state power? We investigate those questions by building a model that, instead of looking at the state as a black box, analyzes the link between various positions in the hierarchy of an autocratic state. The model is inspired by the party-state in China where crony capitalism and corruption play a central role in the economy. We show how the state's distortionary role in the economy encourages corruption between local officials and businesses, and how this corruption creates vertical corruption chains in the party-state hierarchy that threaten loss of political control by the Center over the hierarchy. We show the trade-off between the incentive effects of corruption and the danger of loss of control, leading de facto to define boundaries of corruption. The response by the Center to too high corruption depends on the power distribution within the Center and the de facto dependence of central leaders on support by provincial officials. Our results are consistent with recent developments in China.