HOW DO GROUPS STABILIZE CORRUPTION?

This paper offers a theoretical explanation of the non‐linear relationship between the social structure measured by the fractionalization of a society and its level of corruption. By using a standard repeated multi‐stage‐game of corruption, considering punishment strategies and information transmission inside sub‐networks, we find the maximum level of corruption in highly fractionalized societies consisting of a large number of small groups. This is due to the effect of the relative size of sub‐networks on the trade‐off between the stabilizing effect of increasing the threat‐point towards the official and the destabilizing effect of demanding greater internalization of the negative external effect of corruption within network members. Copyright © 2013 John Wiley & Sons, Ltd.