Entry Restrictions, Corruption and Extortion in the Context of Transition

Inna Cabelkova
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Inna Cabelkova: CERGE-EI

Development and Comp Systems from EconWPA

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 (search for similar items in EconPapers)
JEL-codes: P29 K42 H89 J29 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law and nep-reg
Date: 2001-06-13
Note: Type of Document - Acrobat PDF; pages: 42 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpdc:0106003

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