Revenue Traps

When state officials care about tax revenue and factors of production are mobile across economic sectors, political economies organize themselves into equilibria where officials promote sectors to which resources are allocated, which in turn encourages that resource allocation. Differences across sectors in the ability of officials to extract revenues may result in a “revenue trap”: the persistence of a low-productivity equilibrium even in the presence of large shocks to resource allocation. I argue that the failure of privatization in part of the postcommunist world to effect a shift toward new private economic activity resulted in part from such a trap.