Crony capitalism within corporate structure

Stigler's paper discusses the capture theory of government regulation in which regulations is acquired by an industry, and designed and operated primarily for its benefit. The purpose of government regulation its to help the industry. In class, we discussed how an industry that obtains enough political power to utilize the state will seek to control entry in order to ensure long-term, durable profits. The firms will band together to raise money to buy votes in order gain this political control to regulate the industry in their favor. Firms may choose to fund certain actions by themselves and share the benefit with others. At the end of the class, Professor Coppock read us a quote from Stigler that said, "unfortunately virtue does not commend so high a price." This connects directly to the idea of crony capitalism where industries capture the government and legislators belong to firms not the people.

When firms are considering pursuing projects within their capital budget, they often have different divisions competing to push their project up to management. The divisions will unite against rival proposals and the forecasts of the projects may have been doctored to have a higher NPV. As the project proceeds higher up in the ranks of management, more divisions will unite together and pull the company apart by allowing competing internal interests to exist. Management is then forced to rely on biased estimates of the project and can make poor decisions from the information given or divisions that back the projects. This aligns with crony capitalism in that the divisions will capture management interest through potentially higher profits, commissions, etc and management effectively belongs to the division that boasts the project with the higher NPV. Management of firms is then owned by divisions with the best deal for them like legislators belong to firms that can guarantee the most votes/support. Companies can be bought from within so that managers may be promoted or receive a raise as legislators can be bought by firms with guaranteed votes.

*the second link is to Fundamentals of Corporate Finance Chapter 10