Supply Chains and Demand for Property Rights

• In Event: Is Global Capitalism Good for Democracy?

Abstract

What explains the development of property rights and democratic institutions? A large literature places business interests at the center of institutional development: business interests pressure the government for institutional protections to prevent government predation. According to this line of argument, business interests push for public goods, as opposed to private goods with more narrow benefits, which contrasts with our understanding of firm behavior in many other contexts. In this paper, we question when business owners are likely to demand public goods, like property rights, and when they instead seek out preferential policies, like transfers and market protection. We argue that property rights have heterogeneous benefits across firms: those firms that rely more on connections to other firms associate larger benefits with institutional improvements. First, institutions are necessary to sustain those relationships and facilitate economic exchange. Second, these firms internalize implications for firms in their supply chain. They are therefore more likely to support public goods over private goods, which may benefit only specific firms but impose costs on others. These considerations should be especially pronounced for those firms engaged in relationship-specific production, which faces higher costs to disruption. We develop a formal model to illustrate this logic, and we assess the argument drawing on data from a survey of business executives – owners and managers – in Latin America. The results imply that differences in market structure and production technologies — the extent to which firms rely on ties to other firms — are important for understanding the role of business interests in institutional development.

Authors

• Amy Pond, Washington University in St. Louis

• Timm Betz, Washington University in St. Louis