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Bribes, Lobbying and Development

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  • Harstad, Bård
  • Svensson, Jakob

Abstract

Why are firms more likely to pay bribes to bureaucrats to bend the rules in developing countries while they instead lobby the government to change the rules in more developed ones? Should we expect an evolution from bribing to lobbying, or can countries get trapped in a bribing equilibrium forever? Corruption and lobbying are to some extent substitutes. By bribing, a firm may persuade a bureaucrat to "bend the rules" and thus avoid the cost of compliance. Alternatively, firms may lobby the government to "change the rules". But there are important differences. While a change in the rules is more permanent, the bureaucrat can hardly commit not to ask for bribes also in the future. Based on this assumption, we show that (i) an equilibrium with corruption discourages firms to invest, (ii) firms bribe if the level of development is low, but (iii) they switch to lobbying if the level of development is sufficiently high. Combined, the economy might evolve from a bribing to a lobbying equilibrium, but too large bribes may discourage the necessary investments for lobbying eventually to become an equilibrium. The outcome is a poverty trap with pervasive corruption. This poverty trap is more likely if penalties on corruption are large and the regulatory costs are high.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5759.

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Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5759

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Keywords: corruption; development; lobbying;

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Citations

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Cited by:
  1. Andreas Assiotis & Kevin Sylwester, 2013. "Do the effects of corruption upon growth differ between democracies and autocracies?," University of Cyprus Working Papers in Economics 06-2013, University of Cyprus Department of Economics.
  2. C. Simon Fan & Chen Lin & Daniel Treisman, 2010. "Embezzlement Versus Bribery," NBER Working Papers 16542, National Bureau of Economic Research, Inc.
  3. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.
  4. Simona Fabrizi & Steffen Lippert, 2012. "Corruption and the Public Display of Wealth," Working Papers 1202, University of Otago, Department of Economics, revised Jun 2012.
  5. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
  6. Martin Gregor, 2011. "Corporate lobbying: A review of the recent literature," Working Papers IES 2011/32, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2011.
  7. Francesco Giovannoni, 2011. "Lobbying versus Corruption," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 9(1), pages 12-16, 05.
  8. Octavian Strimbu & Patrick Gonzalez, 2013. "Does Transparency Reduce Corruption ?," Cahiers de recherche CREATE 2013-5, CREATE.
  9. Jakob Svensson, 2005. "Eight Questions about Corruption," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 19-42, Summer.

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