The Inequality of Influence
AbstractThis paper develops a proxy measure of the inequality of influence on the basis of survey evidence from 2002 Business Environment and Enterprise Performance Survey (BEEPS) conducted among 6,500 firms in 27 transition countries. We refer to the resulting inequality as crony bias in the political system that can be measured at both the firm and country level. We examine the impact of crony bias at both the firm and country levels on three indicators of institutional subversion: 1) perceptions of and interaction with courts; 2) security of property rights; 3) tax compliance; and 4) bribery. We find a consistent pattern in which the inequality of influence has a strongly negative impact on assessments of public institutions that ultimately affects the behavior of firms towards those institutions. Crony bias at both the firm and the country levels is associated with a significantly more negative assessment of the fairness and impartiality of courts and the enforceability of court decisions. Further, firms that report crony bias are significantly less likely to use courts to resolve business disputes. Such firms are shown to have less secure property rights than more influential firms. We also find that crony bias is associated with lower levels of tax compliance and significantly higher levels of bribery. The evidence suggests that the inequality of influence not only damages the credibility of institutions among weak firms, but affects the likelihood that they will use and provide tax resources to support such institutions. By withholding tax revenues, paying bribes, and avoiding courts, these firms ensure that such state institutions are likely to remain weak and subject to capture by the more influential. The inequality of influence thus appears to generate a self-reinforcing dynamic in which institutions are subverted further strengthening the underlying political and economic inequalities.
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Bibliographic InfoPaper provided by EconWPA in its series Development and Comp Systems with number 0308005.
Length: 38 pages
Date of creation: 27 Aug 2003
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transition economies; crony bias; bribery; corruption; governance; tax compliance; courts; property rights; public institutions;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- H0 - Public Economics - - General
- K0 - Law and Economics - - General
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- L5 - Industrial Organization - - Regulation and Industrial Policy
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- P2 - Economic Systems - - Socialist Systems and Transition Economies
- P5 - Economic Systems - - Comparative Economic Systems
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
- P0 - Economic Systems - - General
- H4 - Public Economics - - Publicly Provided Goods
- K2 - Law and Economics - - Regulation and Business Law
- K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-08-31 (All new papers)
- NEP-LAM-2003-08-31 (Central & South America)
- NEP-LAW-2003-08-31 (Law & Economics)
- NEP-PBE-2003-08-31 (Public Economics)
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