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The Inequality of Influence

Author

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  • Joel Hellman

    (The World Bank)

  • Daniel Kaufmann

    (The World Bank Institute)

Abstract

This 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.

Suggested Citation

  • Joel Hellman & Daniel Kaufmann, 2003. "The Inequality of Influence," Development and Comp Systems 0308005, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0308005
    Note: Type of Document - Acrobat PDF; pages: 38
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    Cited by:

    1. Irina Slinko & Ekaterina Zhuravskaya & Evgeny Yakovlev, 2005. "Laws for Sale: Evidence from Russia," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 284-318.
    2. Daniel Kaufmann & Aart Kraay & Massimo Mastruzzi, 2003. "Governance Matters III: Governance Indicators for 1996-2002," Macroeconomics 0308006, EconWPA.
    3. Alexander Smajgl, 2004. "Modelling the effect of learning and evolving rules on the use of common-pool resources," Computing in Economics and Finance 2004 178, Society for Computational Economics.
    4. Evgeny Yakovlev & Ekaterina Zhuravskaya, 2005. "State Capture: From Yeltsin to Putin," Working Papers w0052, Center for Economic and Financial Research (CEFIR).
    5. Kaufmann, Daniel, 2003. "Governance Redux: The Empirical Challenge," MPRA Paper 8210, University Library of Munich, Germany.
    6. Bignebat, C. & Gouret, F., 2006. "Which Firms Have a Soft Loan ? Managers' Believes in a Cross-Country Survey in Transition Economies," Working Papers MOISA 200603, UMR MOISA : March├ęs, Organisations, Institutions et Strat├ęgies d'Acteurs : CIHEAM-IAMM, CIRAD, INRA, Montpellier SupAgro - Montpellier, France.
    7. Clarke, George R. G., 2005. "Do government policies that promote competition encourage or discourage new product and process development in low and middle-income countries?," Policy Research Working Paper Series 3471, The World Bank.
    8. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2003. "Government matters III : governance indicators for 1996-2002," Policy Research Working Paper Series 3106, The World Bank.

    More about this item

    Keywords

    transition economies; crony bias; bribery; corruption; governance; tax compliance; courts; property rights; public institutions;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • 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, Innovation, 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; Personnel Economics - - 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

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