The impact of economic institutions on government policy: does contract-intensive economy promote impartial governance?

Abstract

The objective of this study is to show how contract-intensive economic institutions can promote diversity and inclusion of social and political groups in economic and business opportunities provided by governments. Building on the interdisciplinary political economy and governance literatures, two types of economic institutions are identified: rent-seeking and contract-intensive. It is argued that rent-seeking economic activities can reinforce in-group norms, gift-giving practices, and governments' discrimination of groups. However, when contract-intensive activities increase in an economy, they can enhance diversity and inclusion of groups in the marketplace creating opportunity structures outside the state and as businesses press governments toward greater impartiality. Analyses of 165 countries from 1961 to 2011 show that a one standard deviation increase in contract-intensive economic activity is associated with a substantial 18 percent increase in the equality of access to state business opportunities for both social and political groups in the long run.