The Politics of Investor Protection and Competition

External finance is critical for less established entrepreneurs, so poor investor protection can hinder competition. We model how lobbying for weaker investor protection reduces access to finance and decreases competition in countries where politicians are less accountable to voters. Weaker accountability thus produces a smaller economic elite. As empirical support for this result, in a broad panel of countries, we find that countries with more accountable political institutions (as measured by higher newspaper circulation) have better investor protection (as measured by higher creditor rights). This result holds even after controlling for legal origin, per capita GDP, and country fixed effects, indicating that political accountability directly facilitates access to finance. Moreover, the number of producers and entry rates are positively correlated with newspaper circulation in more financially dependent sectors. JEL classification: G21, G28, G32.