The Impact of Financial Integration on Institutions in Autocracies

Ramin Dadasov, Philipp Harms and Oliver Lorz

No 4, Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: It is often argued that a saticfactory institutional quality is prerequi- site for successfull financial integration. This paper analyzes the influence of financial integration on institutional quality. We construct a dynamic politico-economic model in which the ruling elite uses its political power to expropriate the entrepreneurial class. Although financial integration reduces capital costs for the entrepreneurs and therefore increases their gross profits, the elite counteracts this effect by raising the level of expropriation. Consequently, the net income of entrepreneurs may rise or decline depending on the respective magnitude of the countervailing effects. Since political power is linked to economic resources, financial integration also has consequences for the concentration of power in the hands of the elite and for the rise of the entrepreneurial class.

Keywords: Institutions; Capital Mobility; Political Economy (search for similar items in EconPapers)
JEL-codes: F21 O16 P48 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:gdec09:4

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