Political uncertainty and the forms of state capture

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.