doi:10.1017/S0003055410000523 Bribes, Lobbying, and Development B

When facedwith a regulatory constraint, firms can either comply, bribe the regulator to get aroundthe rule, or lobby the government to relax it. We analyze this choice, and its consequences, ina 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. In India, as elsewhere in the developing world, the old business of corruption is meeting a new rival: the Washington-style business of persuasion —–International Herald Tribune, May 31, 2006 Lobbying and corruption have been the subjectof tremendous public interest and research. Sur-prisingly, these two means of influencing regula-tion have either been studied separately or viewed as basically being one and the same. The question of why firms choose to lobby or bribe, and of the consequence