Working Paper: CEPR ID: DP13177
Authors: Konstantin Sonin; Natalia Lamberova
Abstract: The economic transition from socialism in Russia has not resulted in the emergence of impersonal, rule-based institutions. Instead, the natural demand for institutions that protect property rights has led to the emergence of alternative, inefficient institutions such as that of cronyism - the practice of appointing personal acquaintances of the political leader to key positions. A political leader not constrained by institutions appoints cronies, as competent subordinates are more prone to switching allegiance to a potential challenger. As competence makes a bigger difference in a rule-based environment, such a leader has no interest in any institutional development. In a simple empirical exercise, using a data set that covers the richest Russians, we find a positive and significant effect of direct connections to the personal circle of President Putin on the wealth of businessmen. The magnitude of the effect varies at different levels of rents available for redistribution and"network centrality of a businessman": it is higher during the years of high oil prices, but is attenuated by the prominence of the businessman in the network.
Keywords: alternative institutions; political connections; network analysis
JEL Codes: P26; C45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Direct connections to the personal circle of President Putin (D79) | Wealth of businessmen in Russia (P12) |
| Wealth of businessmen in Russia (P12) | Availability of rents for redistribution (D33) |
| Wealth of businessmen in Russia (P12) | Network centrality of the businessmen (D85) |
| High oil prices (Q31) | Effect of political connections on wealth of businessmen in Russia (P12) |
| Direct connections to the personal circle of President Putin (D79) | Greater wealth compared to unconnected counterparts (P19) |
| Economic downturns (E32) | Wealth difference between connected and unconnected individuals (D31) |