Bribes, Lobbying and Development

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 bribing but they tend to switch to lobbying when the level of development is sufficiently high. Bribing, however, is associated with hold-up problems, which discourage firms from investing. If the hold-up problems are severe, firms will never invest enough to make lobbying worthwhile. The country may then be stuck in a poverty trap with bribing forever. The model can account for the common perception that bribing is relatively more common in poor countries while lobbying is relatively more common in rich ones.