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Policy compromises: corruption and regulation in a dynamic democracy

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  • Aidt, Toke

    (University of Cambridge)

  • Jayasri Dutta

    (University of Birmingham)

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 liberalization 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.

Suggested Citation

  • Aidt, Toke & Jayasri Dutta, 2002. "Policy compromises: corruption and regulation in a dynamic democracy," Royal Economic Society Annual Conference 2002 1, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:1
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    Cited by:

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    3. Levy, Daniel, 2007. "Price adjustment under the Table: Evidence on Efficiency-Enhancing Corruption," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 23(2), pages 423-447.
    4. Diaby, Aboubacar & Sylwester, Kevin, 2015. "Corruption and Market Competition: Evidence from Post-Communist Countries," World Development, Elsevier, vol. 66(C), pages 487-499.
    5. Rauf Gönenç & Łukasz Rawdanowicz, 2010. "Regulatory Reforms to Unlock Long–Term Growth in Turkey," OECD Economics Department Working Papers 821, OECD Publishing.

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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