Policy Compromises : Corruption and market reforms in a dynamic democracy

Economics

Further details

(with Toke Aidt)

Corruption and inefficient economic policy go hand in hand. We propose a model of a dynamic democracy that can be used to analyze market reforms and corruption as equilibrium outcomes. Elected politicians introduce, and preserve excessive regulation, which allows them to collect bribes. A majority of the population would like to see these regulations abolished. They can choose to vote politicians out of office if they overregulate. We find Markov-perfect equilibria of the resulting game, and demonstrate that voters agree to tolerate some amount of regulation and corruption. Equilibrium reform levels are too low: the entire population prefers a higher level of liberalization.