Corrupting the Transition to Private Ownership

We describe a political economic framework for an economy once it has transitioned to private ownership in this chapter. The transformation, which is marked by extensive privatisation, is accompanied by a shift in the judicial system, which is controlled by an elite that can be classified as either corrupt or not. The corrupt elite’s capacity to sway the ruling party may result in weak legal institutions, resulting in underinvestment, corruption, and the monopolisation of valuable industries by corrupt capitalists. We show that corrupt investors corrupt the more lucrative industries by generating heterogeneity within industries, and that in corrupt economies, corrupt investors can distinguish themselves from non-corrupt investors. Furthermore, we identified two ways used by corrupt investors to syphon profit – output stealing and profit stealing – and demonstrated that corrupt investors can go back and forth between the two to avoid the limits imposed by stronger institutions. To this reason, strengthening institutions in only one area may, in the end, lead to a reduction in output and investment.

Author (s) Details

Gal Hochman
Rutgers University, New Brunswick, New Jersey, US.

Eithan Hochman
Hebrew University of Jerusalem, Israel.

David Zilberman
University of California, Berkeley, California.

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