Long-run implications of government budget leakage in a Solow-Swan Economy: an evolutionary game approach

Abstract

There is mounting evidence of persistent capture or drainage of government budgetary resources through unlawful means by individuals in the rest of the economy. This paper develops an analytical framework in which such persistence arises as a stable evolutionary equilibrium configuration. Also in keeping with the empirical evidence, this evolutionary equilibrium is characterized by behavioral heterogeneity across decision makers who periodically choose whether or not to engage in illegal activities of capture of government resources. A key implication is that the macrodynamics of the capital stock in per capita terms and the per capita income are crucially affected by the frequency of capturing behavior in the economy in a complex way.