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Entry Restrictions, Corruption and Extortion in the Context of Transition

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  • Inna Cabelkova

Abstract

This paper argues that even temporary barriers to entry present at the very beginning of transition may lead to permanent extortion development. Entry restrictions, if binding, lead to excess profits, which create an incentive to extort. The emergence of extortionists reduces the expected profit from production, making producers expect extortion in the future. If, after this adaptation of expectations, the government removes the barriers to entry, only a few new firms will enter the market. Hence, the total number of firms on the market is lower than it would have been with no barriers to entry. The low number of firms on the market allows each producer to earn relatively high pre-extortion profits, which reinforces the desire of racketeers to take part of their wealth. Consequently, part of the population is permanently diverted from production to rent-seeking activities, which may slow down economic growth, even in the long run.

Suggested Citation

  • Inna Cabelkova, 2001. "Entry Restrictions, Corruption and Extortion in the Context of Transition," CERGE-EI Working Papers wp172, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp172
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    References listed on IDEAS

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    More about this item

    Keywords

    corruption; extortion; transition;
    All these keywords.

    JEL classification:

    • P29 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Other
    • P36 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • H89 - Public Economics - - Miscellaneous Issues - - - Other
    • J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other

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