Frictions to Political Competition and Financial Openness
39 Pages Posted: 11 Aug 2008
Date Written: August 11, 2008
In this paper we present a political economy approach in order to explain the degree of financial openness for an economy. In the model, entrepreneurs, who may have efficient or inefficient projects, vote for policies, which are proposed by selfish politicians. Two political frictions (ideological adherence and a super-majority requirement) impair political competition and give the power to contestants to propose inefficient policies regarding taxation and openness. We show that, in equilibrium, politicians exploit these frictions to receive corruption bribes and fund some inefficient projects. Furthermore, the model implies a non-monotonic relationship between financial openness and corruption and a positive relationship between financial openness and government size. The model predictions are consistent with various empirical findings.
Keywords: corruption, financial openness, ideology, politicians
JEL Classification: G21, G28, H32, P16, P43
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