Knowing the right person in the right place: political connections and resistance to change

We develop a political economy model of Schumpeterian growth with entry where excessive red tape and bureaucracy are used strategically by the incumbent politician to acquire incumbency advantage. By setting sufficiently high red tape, the politician induces the monopolist to invest in networking, as bureaucratic costs can be reduced through personal relationships developed with the incumbent politician, and determines a static gain for voters in case of re-election. Our model generates political equilibria where the incumbent politician secures re-election, and that involve either perpetual upgrading or technological inertia. Although blocked entry implies a dynamic loss, the latter equilibrium is supported by forward-looking voters who value the static gain associated to the status quo. The model provides a possible explanation for the persistence of inefficient democracies and political barriers to technology adoption, where these reflect shared rather than conflicting interests.