By: Alexander Lee
Governments in many middle income countries promote the interests of a small set of firms while erecting barriers to entry and threatening the property rights of other economic actors. We show how such economic favoritism yields second-best outcomes that are nevertheless welfare-superior to scenarios with no property rights, but fall short of the first-best outcome of free entry and open competition. We develop a model to explain how such policies are politically feasible and can be optimal from the perspective of rulers when first-best policies are not.