Political Uncertainty, Market Structure and State Capture

• In Event: Campaign Contributions

Abstract

A vast literature has shown the existence of many different strategies of state capture by firms: from direct forms of control such as bribes and control of the bureaucracy, to highly complex methods that indirectly affect policy. This paper studies the choice of the form of state capture: when and why some firms prefer a more direct to an indirect means of capture. Using a novel database on contractual arrangements between politicians, political brokers and businessmen in Benin, we find that an increase in political uncertainty is associated with: (i) increasing state capture, (ii) an increase in direct forms of capture, and (iii) decreasing transfers to corporations. We rationalize these observations through a principal-agent model under political uncertainty. Firms try to induce distortions in a market by making transfers to incumbents. This can increase their profits and decrease consumer surplus. Direct capture acts as an insurance for the firm, guaranteeing that its paid for distortions are kept in place even when the incumbent is displaced. We structurally estimate our model and show that policies thought to decrease state capture, such as improved bureaucrat selection, can have little to no effect once substitution towards indirect control are accounted for. As a result of our findings, while electoral competition could contribute to democratic consolidation through political turnover, it can lead to worsening corruption and economic outcomes through increasing state capture by business elites."

Authors

• Leonard Wantchekon, Princeton

• Nathan J. Canen, University of Houston