Entry Restrictions, Corruption and Extortion in the Context of Transition
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
April 1, 2001
CERGE-EI Working Paper Series No. 172
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.
Number of Pages in PDF File: 42
Keywords: Corruption, extortion, transition
JEL Classification: P29, P36, K42, H89, J29working papers series
Date posted: November 28, 2009
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.516 seconds