The Political Economy of Dominant Investors: Comment

Abstract

The usual approach of economic theorists to the problem of corporate governance is to design a system of incentives and controls that guarantees the efficient allocation of capital. The approach of E. C. Perotti and E.-L. von Thadden (Perotti and Von Thadden [2006]) is quite different. In their model the regime of corporate governance is not based on the insight of well-meaning economists; corporate governance is rather an endogenous variable of the model, determined by decisions of politicians who have the interests of their voters in mind, and voters who may be shareholders or employees of firms. The evaluation of a regime in a shareholder's view will be different from that in an employee's view, and the political decision will depend on the orientation of politicians towards specific voters. The model combines two elements. The first one is an analysis of the effect of a corporate governance regime, which gives more or less influence to certain groups of stakeholders, upon capital investment decisions in the firm. The second one deals with the political process in which the interests of the median voter, who may belong to either stakeholder group or to both, determines the choice of the corporate governance regime by politicians. The combination of these two elements in the model brings remarkable insights and opens interesting perspectives for further analysis.