Bribes, Lobbying and Development

36 Pages Posted: 17 Aug 2006

See all articles by Jakob Svensson

Jakob Svensson

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Bård Harstad

University of Oslo - Department of Economics

Date Written: July 2006

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.

Keywords: Corruption, lobbying, development

JEL Classification: D72, D92, O16, O17

Suggested Citation

Svensson, Jakob and Harstad, Bård, Bribes, Lobbying and Development (July 2006). CEPR Discussion Paper No. 5759. Available at SSRN: https://ssrn.com/abstract=925016

Jakob Svensson (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 8 163 060 (Phone)
+46 8 161 443 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bård Harstad

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://www.sv.uio.no/econ/english/people/aca/bardh/

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