BRIBE or LOBBY? (it’s a matter of development)

Corruption and lobbying are to some extent substitutes. Through lobbying a firm may be able to "change the rules" to the firm’s advantage. Alternatively, a firm may bribe a bureaucrat to "bend the rules" and thus avoid the cost of compliance. 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 simple assumption, and a simple growth model, 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 may be more likely if there is a lot of regulation and large penalties on corruption these policies should optimally increase in the level of development.