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Economics of Guanxi as an Interpersonal Investment Game

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  • Shi Young Lee

Abstract

The purpose of this paper is to provide a simple model of guanxi given stylized facts. I first outline the intrinsic characteristics of guanxi to draw the stylized facts, and then use these facts to model it as an interpersonal investment game. I find that the degrees of the ability and loyalty of the Recipient must be reasonably high enough for the interpersonal investment to take place. After the investment has occurred, the degree of loyalty must be higher than that of the ability to guarantee stable gaunxi relationships. When the interpersonal investment is made, it is a signal of trust in the ability and loyalty of the Recipient. However, if the ability factor dominates, then the Recipient will not always feel loyal enough to return the favor. This indicates that loyalty counts for more than ability. A related result is that a stable guanxi relationship is unlikely to occur for a highly able person given the equal chance of the two characteristics. This paper also presents some interesting implications for corruption and lock‐in relationships.

Suggested Citation

  • Shi Young Lee, 2010. "Economics of Guanxi as an Interpersonal Investment Game," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 333-342, May.
    • Handle: RePEc:bla:rdevec:v:14:y:2010:i:2:p:333-342
    DOI: 10.1111/j.1467-9361.2010.00556.x
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    References listed on IDEAS

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    2. Eric Cardella, 2016. "Exploiting the guilt aversion of others: do agents do it and is it effective?," Theory and Decision, Springer, vol. 80(4), pages 523-560, April.

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