Political Uncertainty and the Forms of State Capture

62 Pages Posted: 29 Apr 2020 Last revised: 11 Nov 2021

See all articles by Nathan Canen

Nathan Canen

University of Houston

Rafael Ch

Princeton University

Leonard Wantchekon

Princeton University

Date Written: October 27, 2021

Abstract

This paper studies when and why firms prefer more direct forms of state capture (i.e., directly capturing tenured state officials who implement policy, as bureaucrats) to more indirect ones (i.e., using intermediaries, such as elected officials, to influence bureaucrats). First, we propose a principal-agent model under political uncertainty. Firms can induce market distortions by making transfers to incumbents, but such incumbents may be displaced in an election. Direct capture acts as an insurance for the firm, guaranteeing that its paid for distortions are kept in place even when the incumbent loses. We then show that policies thought to decrease state capture, such as improved bureaucrat selection, can have little to no effect once substitution towards indirect control is accounted for. We test the model's predictions using a novel database on contractual arrangements between politicians, political brokers and businessmen in Benin. As proposed by the theory, we find that an increase in political uncertainty is associated with an increase in direct forms of capture. We conclude that electoral competition is not a sufficient mechanism to curb firms' control of government when they can switch forms of state capture.

Keywords: State Capture, Market Structure, Corruption, Lobbying, Electoral Competition

JEL Classification: D72, D73, D78, O17

Suggested Citation

Canen, Nathan and Ch, Rafael and Wantchekon, Leonard, Political Uncertainty and the Forms of State Capture (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3567523 or http://dx.doi.org/10.2139/ssrn.3567523

Nathan Canen (Contact Author)

University of Houston ( email )

4800 Calhoun Road
Houston, TX 77204
United States

Rafael Ch

Princeton University ( email )

United States
9173026600 (Phone)

HOME PAGE: http://https://esoc.princeton.edu/about-us/people/rafael-j-ch-duran

Leonard Wantchekon

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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