How costly is rent-seeking to diversification: an empirical approach

The empirical U-shaped pattern between product diversification and economic development has been widely examined, but here we analyze the determinants of diversification. We find that a high level of rent-seeking activities has a large impact on the diversification of nations: in countries where rent-seeking is a widespread practice, the number of products being exported will be smaller and its value more concentrated in certain goods. Our analysis embraces a large sample of more than 130 countries between 1995 and 2007, using a highly disaggregated export database comprising more than 5000 products. To establish this relationship, we use a Generalized Method of Moments estimation, controlling for endogeneity originated from reverse causality. These empirical predictions contribute to the idea that resources allocated to harm diversification are an important binding constraint for developing countries