Authors: Morck, Randall; Wolfenzon, Daniel; Yeung, Bernard

Source: Journal of Economic Literature, Volume 43, Number 3, September 2005 , pp. 655-720(66)

Publisher: American Economic Association

Abstract:

Outside the United States and the United Kingdom, large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding, and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries' economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance—affecting rates of innovation, economywide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to their actual wealth. This influence can distort public policy regarding property rights protection, capital markets, and other institutions. We denote this phenomenon economic entrenchment, and posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one possible equilibrium. The literature suggests key determinants of economic entrenchment, but has many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/002205105774431252

Publication date: 2005-09-01

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• The Journal of Economic Literature (JEL) began publication in 1969 under the auspices of the American Economic Association with quarterly issues appearing in March, June, September, and December. JEL contains survey and review articles, book reviews, an annotated bibliography of newly published books, and a list of current dissertations in North American universities.
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