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Laws for Sale: An Empirical Study of the Effects of Regulatory Capture

What are the effects of capture of legislature and regulations by few politically powerful firms on growth and redistribution? We build direct measures of regulatory capture and firms' political power based on a unique micro-level dataset on preferential treatment of selected firms by Russian regional legislature and regulatory agencies during 1992-2000. The findings are: 1) political power generates substantial performance gains to firms both in the long and the short run; 2) capture hurts firms that have no political power: their performance decreases with an increase in the level of capture; 3) at the regional level, capture negatively affects small business growth, tax capacity of the state, and the share of social public expenditure; 4) there is no evidence that regulatory capture has had a significant impact on aggregate growth. We distinguish between two possible determinants of preferential treatments - special interest politics and social redistribution and show that the former is empirically more relevant.