Institutions and government controls

This paper develops a model of government policy toward industrial control and regulation that sheds light on the determinants of differential country experiences in terms of organizational arrangement and enterprise performa nce. In contrast to the model developed by Shleifer and Vishny [Shleifer, A ., Vishny, R.W., 1994. "Politicians and Firms," Quarterly Journal of Econom ics, 109, 995-1025; Shleifer, A., Vishny, R.W., 1998. The Grabbing Hand: Go vernment Pathologies and Their Cures. Harvard Univ. Press, Cambridge, MA], which suggests that government controls over firms come about when politici ans can use public funds to buyoff the managers and solicit their cooperati on in politically motivated redistribution of rents, the present shows that it may be the ability to use the government's regulatory powers at discret ion that encourages politicians to impose controls on firms and redistribut e their rents. The model implies that the politicians' appetite for interve ntion tends to be greater when the cost of collecting and using public fund s is higher, which is the opposite of what the Shleifer-Vishny model predic ts. The present model helps explain the puzzling observation that countries with poor institutions are more likely to impose extensive controls on pro duction and maintain large and inefficient public sectors. The model also s heds light on a variety of other stylized facts and puzzles and offers new hypotheses to be tested. (C) 2000 Elsevier Science I3.V. All rights reserve d. JEL classification: L32; L33; L5; H11.