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