Working Paper: CEPR ID: DP4519
Authors: Enrico C. Perotti; Paolo Volpin
Abstract: We develop a model of endogenous lobby formation in which wealth inequality and political accountability undermine entry and financial development. Incumbents seek a low level of effective investor protection to prevent potential entrants from raising capital. They succeed because they can promise larger political contributions than the entrants due to the higher rents earned with less competition. Entry and investor protection improve when wealth distribution becomes less unequal, and the political system becomes more accountable. Consistent with these predictions, in a cross-section of 38 countries we find that greater accountability is associated with higher entry in sectors that are more dependent on external capital and have greater growth opportunities. Also, higher accountability and lower income inequality are associated with more effective legal enforcement, even after controlling for legal origin and per-capita income.
Keywords: entrepreneurship; entry; financial development; growth; income inequality; investor protection; politics
JEL Codes: G21; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher political accountability (D72) | increased entry rates (J68) |
| greater accountability (G38) | bribe required by legislator to accept lower welfare (I38) |
| political accountability (D72) | entry barriers (L13) |
| wealth inequality (D31) | minority protection (J15) |
| political accountability (D72) | informal barriers (J46) |
| greater accountability (G38) | better legal enforcement (K40) |
| better legal enforcement (K40) | increased entry (F29) |