Entry Restrictions, Corruption and Extortion in the Context of Transition
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.
|Date of creation:||13 Jun 2001|
|Note:||Type of Document - Acrobat PDF; pages: 42 ; figures: included|
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- Gerard Roland & Thierry Verdier, 1999.
"Law Enforcement and Transition,"
William Davidson Institute Working Papers Series
262, William Davidson Institute at the University of Michigan.
- Peter Howitt & R. Preston McAfee, 1988. "Stability of Equilibria with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 261-277.
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