Frictions to Political Competition and Financial Openness

39 Pages Posted: 11 Aug 2008

See all articles by Kostas Koufopoulos

Kostas Koufopoulos

University of Warwick - Finance Group

Aristotelis Boukouras

University of Leicester

Date Written: August 11, 2008

Abstract

In this paper we present a political economy approach in order to explain the degree of financial openness for an economy. In the model, entrepreneurs, who may have efficient or inefficient projects, vote for policies, which are proposed by selfish politicians. Two political frictions (ideological adherence and a super-majority requirement) impair political competition and give the power to contestants to propose inefficient policies regarding taxation and openness. We show that, in equilibrium, politicians exploit these frictions to receive corruption bribes and fund some inefficient projects. Furthermore, the model implies a non-monotonic relationship between financial openness and corruption and a positive relationship between financial openness and government size. The model predictions are consistent with various empirical findings.

Keywords: corruption, financial openness, ideology, politicians

JEL Classification: G21, G28, H32, P16, P43

Suggested Citation

Koufopoulos, Kostas and Boukouras, Aristotelis, Frictions to Political Competition and Financial Openness (August 11, 2008). Available at SSRN: https://ssrn.com/abstract=1217093 or http://dx.doi.org/10.2139/ssrn.1217093

Kostas Koufopoulos

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Aristotelis Boukouras (Contact Author)

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
11,657
rank
306
Abstract Views
37,521
PlumX Metrics