Lobbying on Entry
Enrico C. Perotti
University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute
Paolo F. Volpin
London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
CEPR Discussion Paper No. 4519
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.
Number of Pages in PDF File: 47
Keywords: Politics, entry, financial development, entrepreneurship, investor protection, income inequality, growth
JEL Classification: G21, G28, G32working papers series
Date posted: September 17, 2004
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