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Policy Compromises: Corruption and Regulation in a Dynamic Democracy

  • Aidt, T.S.
  • Dutta, J.

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.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0404.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0404.

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Length: 27
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:cam:camdae:0404
Note: PE
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  28. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, June.
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