Political Uncertainty, Market Structure and the Forms of State Capture

Abstract

This paper studies when and why firms prefer more direct forms of state capture (i.e. without intermediaries, such as patronage or appointments to the bureaucracy) to more indirect ones (e.g. lobbying). 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 an increase in direct forms of capture. We rationalize our findings through a principal-agent model under political uncertainty. Firms induce market distortions by making transfers to incumbents. 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 is accounted for.