We show that market competition can distort capital allocation via the lobbying channel. Starting from 1890, the Imperial Russian government selectively restricted the ownership of corporations and commercial property by Jews, an influential minority. We argue that this discriminatory policy can be attributed to increased competition between Jews and the rising Russian majority. We further argue that the increase in inter-ethnic competition was plausibly exogenous, confined to an identifiable historical episode, and differential across industries. Between 1889 and 1894, the government suddenly decreased the interest on its bonds and forcefully repurchased shares of railroad companies, thereby freeing up large amounts of capital that Russian capitalists reinvested in the private sector. To soften competition, Russian capitalists lobbied the government for protection. The incentives to lobby were stronger in the industries to which Russian capitalists were new and in which capital owned by Jews was more easily substitutable.
We test the lobbying hypothesis on the sample of all manufacturing corporations created in 1891– 1913 using the RUSCORP database of Russian corporations (Owen, 1992). Our identifying variation comes from two testable assumptions. First, liquidity constraints had been binding for the majority of Russian entrepreneurs before the government-initiated capital shock in 1889–1894. Second, there were pre-existing, “inherent” differences in capital intensity across industries as of the time of the shock. To measure these differences, we construct a novel database of the universe of 15,691 factories in European Russia in 1890. For each factory, we collect information on the number of workers, number of steam engines (if any), total machine power, and total revenue, which we then use to create indexes of capital intensity for all 73 industries in our database.
We find that between 1891–1913 anti-Jewish restrictions were 18 p.p. more likely in medium capital- intensive industries (relative to a baseline of 19 percent) than in low capital-intensive industries. At the same time, observed discrimination was relatively rare in high capital-intensive industries, where Jewish entrepreneurs remained indispensable to the government as money lenders, as well as because they had ties to the international creditors of the tsar. In addition, we test whether the dominant position of Jewish entrepreneurs prior to 1890 was due to superior technology and skills and not due to higher capital endowments. For 1890 factories, we calculate various measures of productivity and find no statistically significant difference in productivity between the factories owned by Jews and non-Jews. Finally, we address the possibility that discrimination was caused by the increase in ethnic prejudice in the exact
industries where Jews had been more represented. We proxy ethnic prejudice by restrictions in the labor market, which precluded Jews from occupying managerial and other non-entrepreneurial positions; such clauses were also included in corporate charters. Although there was an increase in labor market restrictions after 1890, it seemed to follow the pre-1890 trend and was common for all industries. This finding indicates that discrimination against Jewish entrepreneurs was determined by the structure of the capital market and not by the changing attitudes per se.