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1、THEWILLIAMDAVIDSONINSTITUTEATTHEUNIVERSITYOFMICHIGANBUSINESSSCHOOLProvincialProtectionism*By:KonstantinSoninWilliamDavidsonWorkingPaperNumber557April2003ProvincialProtectionism∗KonstantinSoninNewEconomicSchool,CEFIR,andCEPRApril,2003AbstractInafederalstate,politicalleadersofcon
2、stituentunitsmightprotecttheirenter-prisesfromthefederalcenter(e.g.,allowingthemnottopayfederaltaxes).Theeffectivenessofsuchprotectiondependscruciallyontheabilityoflocalauthoritiestoextractrentsfromenterprises.Theycaneasilydoso,ifthereisasmallnumberofenterpriseswithlargeemployme
3、nt,andlocalmonopoliescanbeeffectivelysustained.Theycannotdoitsoeasilyifregionalindustryiscompetitive,politicaloppositionisstrong,andthefederalcenterhasenoughmeanstoenforcepaymentoftaxes.Webuildasimplemodeltoarguethatitistheindustrialstructureofconstituentunitsthatdeterminespolit
4、icalrelationsbetweenthemandthefederalcenter.ThetheoryissupportedbytherecentexperienceofRussia,China,andArgentina.∗TheauthorisgratefultotheDavisCenterforRussianandEurasianStudiesatHarvardforhospitalityduring2000-01academicyear,seminarparticipantsinColumbiaUniversityandUniversity
5、ofChicago,andtoRichardEricson,ScottGehlbach,PhilipKeefer,RogerMyerson,JohnNye,YingyiQian,GerardRoland,AndreiShleifer,AlexandraVacroux,BarryWeingast,andEkaterinaZhuravskayaforhelpfulcomments.11IntroductionInafederalstate,politicalleadersofconstituentunitsmightprotecttheirenterpr
6、isesfromthefederalcenter.Thoughsuchprotectionissometimesbeneficial,therecentexperienceofRussia,Argentinaandsomeotherlargefederationsshowsthatitmightdomuchmoreharmthangood.Thewillingnesstoprotectdependscruciallyontheabilityoflocalauthoritiestoextractrentsfromenterprises.Theycanea
7、silydosoifthereisasmallnumberofenterpriseswithlargeemployment,andlocalmonopoliescouldbeeffectivelysustained.Theywouldhavemuchmoretroubleextractingrentsifregionalindustryiscompetitive,politicaloppositionisstrong,andthefederalcenterhasenoughmeanstoenforcepaymentoftaxes.Thispaperai
8、mstocastlightontheinteractionofpoliticalinstitutionsan
