Policy Compromises: Corruption and Regulation in a Democracy

27 Pages Posted: 12 Aug 2005

See all articles by Toke Skovsgaard Aidt

Toke Skovsgaard Aidt

University of Cambridge - Faculty of Economics and Politics

Jayasri Dutta

University of Birmingham - Department of Economics

Date Written: May 2005

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 reelect 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 economic policy is counter-cyclical in a corrupt democracy.

Keywords: Corruption, entry regulation, performance voting, economic growth

JEL Classification: D72, K42, O41

Suggested Citation

Aidt, Toke Skovsgaard and Dutta, Jayasri, Policy Compromises: Corruption and Regulation in a Democracy (May 2005). Available at SSRN: https://ssrn.com/abstract=774006 or http://dx.doi.org/10.2139/ssrn.774006

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 - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom
+44 0121 4 146640 (Phone)

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