Policy Compromises: Corruption and Regulation in a Dynamic Democracy

Toke S Aidt () and Jayasri Dutta

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper evaluates the extent of regulation in a democracy with political corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalisation implies free entry and allocative efficiency and is supported by a majority of voters. Voters reelect politicians based on observed performance. We study Markov-perfect equilibria of the resulting game, and demonstrate that voters agree to tolerate some corruption and inefficient regulation in political equilibrium. Efficient policies can be promoted by productivity growth. Political corruption entails excessive stabilization of aggregate fluctuations.

Keywords: Corruption; performance voting; economic growth. (search for similar items in EconPapers)
JEL-codes: D72 K42 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-dev, nep-law and nep-pol
Date: 2004-01
Note: PE
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Related works:
Working Paper: Policy compromises: corruption and regulation in a dynamic democracy (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:cam:camdae:0404

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