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Because government intervention transfers resources from one party to another, it creates room for corruption. As corruption often undermines the purpose of the intervention, governments will try to prevent it. They may create rents for bureaucrats, induce a misallocation of resources, and increase the size of the bureaucracy. Since preventing all corruption is excessively costly, second-best intervention may involve a certain fraction of bureaucrats accepting bribes. When corruption is harder to prevent, there may be both more bureaucrats and higher public-sector wages. Also, the optimal degree of government intervention may be nonmonotonic in the level of income. (JEL D23, H40)

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In this paper, we argue that the political‐commitment problem provides an explanation for why much income redistribution takes an inefficient form, particularly employment in the public sector. A job is a credible way of redistributing when it provides rents (such as in situations with moral hazard), and employment is optimal ex post. Moreover, a job is selective and reversible, and thus ties the continuation utility of a voter to the political success of a particular politician. We show that the need to make offers of employment incentive‐compatible leads to inefficiencies in the supply of public goods. We also show that such inefficient redistribution becomes relatively attractive in situations with high inequality and low productivity. Inefficiency is increased when the stakes from politics are high, when inequality is high, and when money matters less than ideology in politics.

We consider an economy where property rights are necessary to ensure sufficient rewards to ex ante investments. Because enforcement of property rights influences the ex post distribution of rents, there is room for corruption. We characterize the optimal organization of the society and optimal degree of property right enforcement subject to incentive constraints of the agents. We find that three frequently mentioned government failures arise quite naturally as part of the optimal mechanism; (i) rents for government employees, (ii) corruption, and (iii) misallocation of talent.Therefore, these observations are not in themselves proof of government failure. We also discover that the general equilibrium aspect of our model leads to a number of new results: there may exist a "free-lunch" such that over a certain range it is possible to simultaneously reduce corruption, misallocation of talent and increase investments; and it will often be the case that bureaucracies will impose a certain amount of self-discipline.

We build a dynamic model of …rm-level adjustment to trade liberalization that jointly incorporates the main salient features highlighted by recent empirical micro-level studies of …rms and trade. Our model captures the joint entry, exit, export, and innovation decisions (subject to sunk costs) of heterogeneous …rms as they adjust to trade liberalization. We characterize this industrial evolution over its entire transition path to a new steady state with lower trade costs-starting from the time that trade liberalization is …rst announced (but not necessarily yet implemented). We rely on numerical methods to solve for these equilibrium paths. In order to more accurately capture the dynamics of …rm adjustments to trade, we model the sunk nature of market entry costs for both the domestic and export market-as well as the per-unit and additional …xed costs of exporting incurred in every period. Firm-level productivity evolves stochastically, and innovation involves a trade-o¤ between its cost and a return in terms of a "better" distribution of future productivity draws. Although the empirical micro-level studies of …rms and export status initially emphasized the selection e¤ects of more productive …rms into export markets, several recent studies have highlighted a separate channel for the e¤ects of trade on productivity operating through …rmlevel improvements in productivity. Our model captures both of these channels for the productivity enhancing e¤ects of trade-and analyzes their interactions over the adjustment path to lower trade costs. In particular, we highlight how the relative timing and magnitude of …rm-level productivity improvements and export market entry decisions are also determined by non-technological factors such as the timing of trade liberalization announcements and the speed of liberalization. Under all these di¤erent trade liberalization scenarios (anticipated versus surprise, gradual versus sudden), we characterize both the distributional e¤ects across …rms as well as their aggregate e¤ects for industrial performance. We …nd that the anticipation of upcoming liberalization, and a more gradual path of liberalization (once implemented) induces …rms to innovate ahead of export market entry. We are grateful to Robert Feenstra, Elhanan Helpman, and Esteban Rossi-Hansberg for helpful discussions and suggestions. We also greatly bene…ted from all the discussions at the book conference where the paper was originally presented.