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The Inequality of Influence

Joel S. Hellman

World Bank - Governance and Public Sector Reform

Daniel Kaufmann

Natural Resource Governance Institute (NRGI); The Brookings Institution

December 2002

This paper develops a proxy measure of the inequality of influence on the basis of survey evidence from 2002 Business Environment and Enterprise Performance Survey (BEEPS) conducted among 6,500 firms in 27 transition countries. We refer to the resulting inequality as crony bias in the political system that can be measured at both the firm and country level. We examine the impact of crony bias at both the firm and country levels on three indicators of institutional subversion: 1) perceptions of and interaction with courts; 2) security of property rights; 3) tax compliance; and 4) bribery. We find a consistent pattern in which the inequality of influence has a strongly negative impact on assessments of public institutions that ultimately affects the behavior of firms towards those institutions. Crony bias at both the firm and the country levels is associated with a significantly more negative assessment of the fairness and impartiality of courts and the enforceability of court decisions. Further, firms that report crony bias are significantly less likely to use courts to resolve business disputes. Such firms are shown to have less secure property rights than more influential firms. We also find that crony bias is associated with lower levels of tax compliance and significantly higher levels of bribery. The evidence suggests that the inequality of influence not only damages the credibility of institutions among weak firms, but affects the likelihood that they will use and provide tax resources to support such institutions. By withholding tax revenues, paying bribes, and avoiding courts, these firms ensure that such state institutions are likely to remain weak and subject to capture by the more influential. The inequality of influence thus appears to generate a self-reinforcing dynamic in which institutions are subverted further strengthening the underlying political and economic inequalities.

Number of Pages in PDF File: 38

Keywords: transition economies, crony bias, bribery, corruption, governance, tax compliance, courts, property rights, public institutions

JEL Classification: D4,H0,K0,L1,L2,L5,O1,P2,P6,P5,M2,P0,H4,K2,K4

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Date posted: May 12, 2003  

Suggested Citation

Hellman, Joel S. and Kaufmann, Daniel, The Inequality of Influence (December 2002). Available at SSRN: https://ssrn.com/abstract=386901 or http://dx.doi.org/10.2139/ssrn.386901

Contact Information

Joel S. Hellman
World Bank - Governance and Public Sector Reform ( email )
1818 H Street
Washington, DC 20433
United States
Daniel Kaufmann (Contact Author)
Natural Resource Governance Institute (NRGI) ( email )
80 Broad Street
New York, NY 10004
United States
HOME PAGE: http://www.resourcegovernance.org
The Brookings Institution ( email )
1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
HOME PAGE: http://www.brookings.edu/experts/kaufmannd
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