Shi Young Lee, Chung Ang University

Abstract

The purpose of this paper is to provide a simple model of guanxi given stylized facts. We first outline the intrinsic characteristics of guanxi in order to draw the stylized facts, and we then use these facts to model it as an inter-personal investment game. We find that the degrees of the ability and loyalty of the Recipient must be reasonably high enough for the inter-personal investment takes place. After the investment has occurred, the degree of loyalty must be higher than that of the ability to guarantee the stability of gaunxi. 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 stable guanxi 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.