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Abstract

A simple two-sector endogenous growth model of government spending and growth is developed with a producing and a lobbying sector. Lobbyists divert government spending for private gains. One key innovation is this: With democratization, information (and power) becomes more diffused (public), allowing more lobbyists to lobby but reducing gains per lobbyist. Thus, aggregate rents rise with the number of lobbyists but fall with increasing competition among them. This simple mechanism produces a "U" curve in which growth falls with early democratization but rises later, and a related "inverted U" curve in which rents rise with early democratization but fall later. Extensive empirical test of the interrelationship between growth, government spending, corruption (Proxy for rents) and democracy for 61 countries verify the key structural aspects of the model.

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