Entry Restrictions, Corruption and Extortion in the Context of Transition

CERGE-EI Working Paper Series No. 172

42 Pages Posted: 28 Nov 2009

See all articles by Inna Cabelkova

Inna Cabelkova

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: April 1, 2001

Abstract

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.

Keywords: Corruption, extortion, transition

JEL Classification: P29, P36, K42, H89, J29

Suggested Citation

Cabelkova, Inna, Entry Restrictions, Corruption and Extortion in the Context of Transition (April 1, 2001). CERGE-EI Working Paper Series No. 172. Available at SSRN: https://ssrn.com/abstract=1514531 or http://dx.doi.org/10.2139/ssrn.1514531

Inna Cabelkova (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
447
PlumX Metrics