Transaction Costs and Crony Capitalism in East Asia

Abstract:     
Why did corruption and cronyism impede growth in some Asian countries but not in others? Building upon theoretical advances in the fields of rent-seeking, transaction costs, and the new institutional economics, this study finds that if there is a balance of power among a small and stable number of government and business actors, cronyism can actually reduce transaction costs and minimize deadweight losses; while either too few or too many actors leads to bandwagoning politics that increases deadweight losses from corruption. By examining corruption and cronyism through the lens of transaction costs, and showing why a particular set of government-business relations- although corrupt - also lowered transaction costs and made investment more credible while another set of relations did not, this study provides the outlines of a story that can both explain one aspect of corruption and also yields a theoretically-grounded causal mechanism that lets us distinguish between types of corruption.

Number of Pages in PDF File: 46

Keywords: Transaction Costs, Asia, Development, Corruption, Cronyism

JEL Classification: O1, P5

working papers series