Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment

Raghuram G. Rajan

NBER Working Paper No. 12093
Issued in March 2006, Revised in January 2008
NBER Program(s):Corporate Finance Program, Economic Fluctuations and Growth Program, Law and Economics Program

Initial inequality in endowments and opportunities, together with low average levels of endowments, can create constituencies in a society that combine to paralyze reforms, even though the status quo hurts them collectively. Each constituency prefers reforms that expand its opportunities, but in an unequal society, this will typically hurt another constituency's rents. Competitive rent preservation ensures no comprehensive reform path may command broad support. Though the initial conditions may well be a legacy of the colonial past, persistence does not require the presence of coercive political institutions, perhaps one reason why underdevelopment has survived independence and democratization. Instead, the roots of underdevelopment may lie in the natural tendency towards rent preservation in a divided society.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w12093

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