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Bribes, Lobbying, and Development

Published online by Cambridge University Press:  09 February 2011

BÅRD HARSTAD*
Affiliation:
Northwestern University
JAKOB SVENSSON*
Affiliation:
Stockholm University
*
Bård Harstad is Associate Professor of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208; also University of Oslo and the National Bureau of Economics Research (harstad@northwestern.edu).
Jakob Svensson is Professor of Economic, Institute for International Economic Studies, Stockholm University, SE-106 91 Stockholm, Sweden; also Centre for Economic Policy Research (jakob.svensson@iies.su.se).

Abstract

When faced with a regulatory constraint, firms can either comply, bribe the regulator to get around the rule, or lobby the government to relax it. We analyze this choice, and its consequences, in a simple dynamic model. In equilibrium, when the level of development is low, firms are more inclined to bend the rule through bribery but they tend to switch to lobbying when the level of development is sufficiently high. Bribery, however, is associated with holdup problems, which discourage firms from investing. If the holdup problems are severe, firms will never invest enough to make lobbying worthwhile. The country may then be stuck in a poverty trap with bribery forever. The model can account for the common perception that bribery is relatively more common in poor countries, whereas lobbying is relatively more common in rich ones.

Type
Research Article
Copyright
Copyright © American Political Science Association 2011

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