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Can Bribes Buy Protection Against International Competition?
Unformatted Document Text:  1 b pr x G r xp λ ε − = (10) Hence, the trade barrier decided on by self-interested politicians will come to depend on the level of corruption, b P , as depicted in Figure 2. FIGURE 2 ABOUT HERE 2.3. Summing up predictions Both loose theoretical considerations as well as a formal model thus suggest that trade policy and corruption are endogenously formed. The three lemmas below summarize the main predictions of the theoretical model. Yet, whether trade policy and corruption are in fact associated and under which specific conditions are empirical questions to be explored in the remainder of the paper. Lemma 1: When combating corruption in customs by increasing the expected fine μF paid by importing firms, the administrative barrier t is lowered. Proof: While the supply of t in (5) is unaffected, demand is reduced, which in turn lowers the optimal t set by customs officers. Lemma 2: When combating corruption by increasing the expected relative fine λG paid by domestic firms, the official trade barrier r is lowered. Proof: While the supply of r given by (7) is unaffected, demand in (10) is reduced, which lowers firms’ optimal bribe, b P . This in turn lowers the optimal r set by (corrupt) politicians. 10

Authors: Bjørnskov, Christian.
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background image
1
b
pr
x
G
r
xp
λ
ε
=
(10)
Hence, the trade barrier decided on by self-interested politicians will come to depend on
the level of corruption, b
P
, as depicted in Figure 2.
FIGURE 2 ABOUT HERE
2.3. Summing up predictions
Both loose theoretical considerations as well as a formal model thus suggest that trade
policy and corruption are endogenously formed. The three lemmas below summarize
the main predictions of the theoretical model. Yet, whether trade policy and corruption
are in fact associated and under which specific conditions are empirical questions to be
explored in the remainder of the paper.
Lemma 1: When combating corruption in customs by increasing the expected fine μF
paid by importing firms, the administrative barrier t is lowered.
Proof: While the supply of t in (5) is unaffected, demand is reduced, which in turn
lowers the optimal t set by customs officers.
Lemma 2: When combating corruption by increasing the expected relative fine λG paid
by domestic firms, the official trade barrier r is lowered.
Proof: While the supply of r given by (7) is unaffected, demand in (10) is reduced,
which lowers firms’ optimal bribe, b
P
. This in turn lowers the optimal r set by (corrupt)
politicians.
10


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