Building efficient institutions: A two-stage differential game

We consider a two-stage dynamic game with a corrupt government and civil society as its players. We characterize open-loop Nash equilibria and an interior switching time from a regime with high government corruption which persists in the first stage (bad regime) to a free-corruption regime and greater institutional quality (good regime, second stage). We found that an increase of optimism (pessimism) in the society will lead the civil society to invest less (more) efforts to fight corruption whereas a corrupt government will invest more (less) efforts in repression policy. Overall, the numerical results show that the higher the efficiency of the civil monitoring effort, the efficiency of institutions and the lower the discount rate; the higher the inertia which will lead the economy to a much earlier switch to good regime with low corruption as the jump occurs early.