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.
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Find related papers by JEL classification: D4 - Microeconomics - - Market Structure and Pricing H0 - Public Economics - - General K0 - Law and Economics - - General L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior L5 - Industrial Organization - - Regulation and Industrial Policy O1 - Economic Development, Technological Change, and Growth - - Economic Development P2 - Economic Systems - - Socialist Systems and Transition Economies P5 - Economic Systems - - Comparative Economic Systems M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics P0 - Economic Systems - - General H4 - Public Economics - - Publicly Provided Goods K2 - Law and Economics - - Regulation and Business Law K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
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Irina Slinko & Evgeny Yakovlev & Ekaterina Zhuravskaya, 2003.
"Laws for Sale: Evidence from Russia,"
Working Papers
w0031, Center for Economic and Financial Research (CEFIR).
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