SPECIAL INTERESTS AND FINANCIAL LIBERALIZATION: THE CASE OF MEXICO

Financial liberalization is often believed to enhance economic growth. Yet in many cases a few powerful incumbents seem to capture most of the gains from the reform. In this paper, I construct a model with endogenous formation of special interest groups that could reap most of the benefits of financial liberalization. In particular, these groups lobby to limit entry by other firms, while taking advantage of improved borrowing opportunities. I then use the model to study the Mexican financial liberalization of 1988. Analysis of firm-level panel data on manufacturing plants reveals patterns suggested by the model. Specifically, large firms in more concentrated or more corrupt sectors benefit more from liberalization. In addition, domestically owned firms gain more than firms with foreign ownership. I also propose a new way to measure corruption at the industry level based on the Mexican 10% profit sharing rule.