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Investor Protection and Entry

Listed author(s):
  • Enrico Perotti

    ()

    (University of Amsterdam)

  • Paolo Volpin

    ()

    (London Business School)

Entry requires external finance, especially for less wealthy entrepreneurs, so poor investor protection limits competition. We model how incumbents lobby harder to block access to finance to entrants when politicians are less accountable to voters. In a broad cross-section of countries and industries, we find that (i) entry rates and the total number of producers are positively correlated with investor protection in financially dependent sectors and (ii) countries with more accountable political institutions have better investor protection and lower entry costs. We also find that investor protection is more critical to entry than financial market development. We measure political accountability as access to information. Newspaper readership has much more explanatory power than formal measures of democracies. The effect of diffusion of the press is not due to differences in education or in state ownership of the press. Thus newspaper readership appears to proxy for the degree of informed private scrutiny on political decisions.

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File URL: http://papers.tinbergen.nl/07006.pdf
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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-006/2.

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Date of creation: 12 Jan 2007
Handle: RePEc:tin:wpaper:20070006
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  1. Rafael La Porta & Florencio Lopez-de-Silanes & Guillermo Zamarripa, 2003. "Related Lending," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 231-268.
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  26. repec:cup:apsrev:v:90:y:1996:i:02:p:303-315_20 is not listed on IDEAS
  27. Enrico Perotti & Ernst-Ludwig von Thadden, 2005. "The Political Economy of Corporate Control," Tinbergen Institute Discussion Papers 05-102/2, Tinbergen Institute.
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