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Policy compromises: corruption and regulation in a dynamic democracy

  • Aidt, Toke

    (University of Cambridge)

  • Jayasri Dutta

    (University of Birmingham)

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.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 1.

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Date of creation: 29 Aug 2002
Handle: RePEc:ecj:ac2002:1
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