POLICY COMPROMISES: CORRUPTION AND REGULATION IN A DEMOCRACY

Toke S Aidt () and Jayasri Dutta

Economics and Politics, 2008, vol. 20, issue 3, pages 335-360

Abstract: This paper evaluates the extent of regulation in a democracy with corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalization implies free entry and allocative efficiency. Voters re-elect politicians based on observed performance. We demonstrate that voters agree to tolerate corruption and inefficient regulation; that efficient policies can be promoted by productivity growth; that productivity growth reduces the cost of providing wage incentives; and that corruption is procyclical and economic policy is countercyclical in a corrupt democracy. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd.

Date: 2008
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