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Policy Compromises: Corruption And Regulation In A Democracy

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  • TOKE S. AIDT
  • JAYASRI DUTTA

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.

Suggested Citation

  • Toke S. Aidt & Jayasri Dutta, 2008. "Policy Compromises: Corruption And Regulation In A Democracy," Economics and Politics, Wiley Blackwell, vol. 20(3), pages 335-360, November.
    • Handle: RePEc:bla:ecopol:v:20:y:2008:i:3:p:335-360
    DOI: 10.1111/j.1468-0343.2008.00332.x
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