Elite interest and economic development

• Main Authors: Jiang, Xinyi, Jin, Chuqing, Yi, Xin
• Other Authors: Giovanni Ko
• Format: Final Year Project
• Language: English
• Published: 2015
• Subjects: DRNTU::Social sciences::Economic development::China; DRNTU::Social sciences::Economic theory::Public finance
• Online Access: http://hdl.handle.net/10356/62464
• Institution: Nanyang Technological University

In this paper, we study how fiscal capacity and inequality in capital endowment affect the elite’s decision to liberalise intermediate goods monopolies that they own. We do this by extending Li et al. (2014)’s general equilibrium model of ‘state capitalism’ in China to accommodate fiscal capacity and inequality in capital endowment. In this setting, liberalisation means that the intermediate goods are produced by competitive firms earning zero profits, rather than monopolies, leading to higher total income and greater efficiency. Among other results, we show that the elite prefer liberalisation if the share of capital that they own is sufficiently large. Intuitively, this is because with a high enough capital endowment of the elite, the additional capital income due to efficient liberalisation offsets the loss of monopoly profits. We also show that the elite prefer liberalisation if fiscal capacity is sufficiently great, that is, if the elite can set high enough tax rates on the income of the non-elites. Intuitively, this is because with a sufficiently great fiscal capacity, the elite can appropriate enough of the additional surplus generated by liberalisation to offset the loss of monopoly profits. Finally, we use data on elite capital endowment and fiscal capacity from 20 countries to argue that the predictions of our model are consistent with the real world.