Policy Compromises: Corruption and Regulation in a Democracy

26 Pages Posted: 16 Oct 2008

See all articles by Toke Skovsgaard Aidt

Toke Skovsgaard Aidt

University of Cambridge - Faculty of Economics and Politics

Jayasri Dutta

University of Birmingham

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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

Aidt, Toke Skovsgaard and Dutta, Jayasri, Policy Compromises: Corruption and Regulation in a Democracy. Economics & Politics, Vol. 20, Issue 3, pp. 335-360, November 2008. Available at SSRN: https://ssrn.com/abstract=1283993 or http://dx.doi.org/10.1111/j.1468-0343.2008.00332.x

Toke Skovsgaard Aidt (Contact Author)

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 1223 33 5231 (Phone)
+44 1223 33 5475 (Fax)

Jayasri Dutta

University of Birmingham ( email )

Department of Civil Engineering
Birmingham, VT Birmingham B15 2TT
United Kingdom

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