Legal Standards, Enforcement, and Corruption

Stricter laws require more incisive and costlier enforcement. Because enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per capita income and decreasing in officials' corruption. In contrast to the "tollbooth view" of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials' corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation shows that standards correlate positively with per-capita income, and negatively with corruption, consistent with the model's predictions for benevolent governments. (JEL: D73, K42, L51) (c) 2010 by the European Economic Association.