“Towards a Political Theory of the Firm” Zingales, Luigi Flashcards
What is the main idea?
Too much political power of firms is bad for the economy and democracy.
What is wrong with the contemporary economic’s view of a firm?
Some corporations have higher revenue than governments. These corps can achieve almost anything through money, lobbying, bribes.
They are not held accountable for their actions (Contemporary economics ignores politics and power, says that a firm is a “nexus of contracts”, with no objectives or life separate from those of its contracting parties).
Author argues:
The interaction of concentrated corporate power and politics is a threat to
o The functioning of the free market economy
o The economic prosperity it can generate
o Democracy
How have large firms used their power in the past? (From Adam Smith to the neoclassical theory of the firm)
Adam Smith had a negative view of corporations due to their monopolistic behaviour.
In a winner-take-all economy, entrepreneurs lobby and corrupt to seize a crucial first-mover advantage and preserve their power over time.
Incompleteness of contracts (doesn’t say everything you can/should do) creates room for bargaining for parties.
“Medici vicious cycle”: Ability to influence political power increases with economic power–> Need to influence political power increases.
o Money is used to gain political power –> political power is used to make more money
Which factors determine the allocation of authority and power during bargaining?
o Who has the product on hand while producing
o Availability of alternatives
o Institutional environment (laws, norms, info flow)
What are the reasons and explanations for high concentration of large powerful firms in the US?
Reasons: Slower rate of creation of new firms & A lot of merging of firms.
Explanations for high concentration:
o Emergence of network externalities – increased usage of product leads to direct increase in value for other users (having a bigger network leads to positive externalities/values)
o Increased role of winner-take-all industries (due to expansion of information-intensive goods that have high fixed and low marginal costs) – more industries benefit from large firms due to compound effect of having information or resources (Facebook, who owns Instagram, for example)
o Reduced antitrust enforcement – less going after monopolies
Why do large corporations spend a small amount on lobbying?
o Opposition of corps (general public) is very disorganized, doesn’t take much to win
o Big corps are very good at achieving their goals without paying others
Market power gives corporations a comparative advantage at the influence game: the greater their market power, the more effective they are at obtaining what they want from the political system.
Why has the power of corporations to shape the rules of the game become stronger?
◦ The size and market share of companies has increased (reduces competition in the sector)
◦ The size and complexity of regulation has increased (makes it easier for vested interests to tilt the playing field to their advantage)
◦ Anticorporation ideology is dying (has reduced the costs of being perceived as too friendly to the interests of big business for both parties)
How is the ideal state of affairs between the power of the state and of the firms called?
“Goldilocks” equilibrium – There needs to be a balance between the power of the state and the power of the firms.
Scandinavia and US in the II part of 20th century are the closest to “goldilocks” balance.
Why is it a problem if we’re not in the “Goldilocks” equilibrium?
◦ If the state is too weak to enforce property rights, then firms will either resort to enforcing these rights by themselves (through private violence) or collapse
◦ If a state is too strong, rather than enforcing property rights it will be tempted to expropriate from firms
◦ When firms are too weak, they risk being expropriated, if not formally (with a transfer of property rights to the government), then substantially (when the state demands a large portion of the returns to any investment)
◦ When firms are too strong, they may shape the definition of property rights and its enforcement in their own interest and not in the interest of the public at large
What are the 4 types of regimes based on balance between economic and political power?
o Communist dictatorships – political power has captured all economic power
o Plutocratic regimes – only economic power
o Political patronage regimes – political power grants economic power
o Vertical politically integrated regimes – rich businessmen control the political system
What are the ways to fight the risks of states turning into economic centric power?
o Increases in transparency of corporate activities
o Improvements of corporate democracy
o Better rules against revolving doors
o More attention to the risk of capture of scientists and economists by corporate interest
o More aggressive use of antitrust authority
o Attention to the functioning and the independence of the media market
o Broader public awareness (might be most important)
