Democratic Spillovers

Abstract

Capital mobility is a channel of either positive or negative institutional spillovers between countries. This article emphasizes the importance of the distribution of capital in deciding which type of spillovers will play out. Widely distributed capital ownership disciplines a rent seeking elite, and favors political inclusiveness. Conversely, when capital is concentrated, the elite take advantage of the existence of an alternative jurisdiction to increase rent extraction and cement their rule. This highlights a potentially dysfunctional role played by a neighbor with good institutions, and suggests an endogenous path for the emergence of tax havens.