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Corruption and industrial dualism in less developed countries

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  • Patrick Emerson

Abstract

This paper provides an explanation for the observation that developing countries tend to have a higher degree of dualism in the size distribution of firms and a relatively smaller proportion of large firms than do developed countries. This paper builds a model where large 'formal' firms attract rent seeking activities from the government while small firms do not. In the model, there exists a 'competitive fringe' of small firms and a formal market consisting of Cournot competitors. The number of formal firms is made endogenous and is a function of the degree to which the government can extract rents. This ability to extract rents is itself posited as a function of the degree of corruption in a country's government. Thus, it is the high degree of corruption in developing country governments that contributes to the dual nature of their industrial structure. The model predicts that the higher the degree of corruption, the fewer (and larger) are the formal firms, the lower is social welfare and the greater is dead-weight loss, and the higher are government rents. An examination of the size distribution of 16 countries and their degree of corruption shows that the degree of corruption is a good predictor of the percentage of large firms in an economy.

Suggested Citation

  • Patrick Emerson, 2001. "Corruption and industrial dualism in less developed countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 11(1), pages 63-76.
  • Handle: RePEc:taf:jitecd:v:11:y:2001:i:1:p:63-76
    DOI: 10.1080/09638190110093163
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    Cited by:

    1. Emerson, Patrick M., 2006. "Corruption, competition and democracy," Journal of Development Economics, Elsevier, vol. 81(1), pages 193-212, October.
    2. Daphne Athanasouli & Antoine Goujard & Pantelis Sklias, 2012. "Corruption and firm performance: Evidence from Greek firms," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 5(2), pages 43-67, August.

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