Taxability and Low-Productivity Traps

When governments care about tax revenues, the taxability of different forms of economic activity will influence the decisions of governments about what activity to support. If factors of production are mobile across sectors which differ in their taxability, political economies will organize themselves into equilibria where governments support activity because resources are allocated to it, which in turn encourages that resource allocation. When resources and government support are organized in support of an “old” equilibrium, and the possibility of a “new,” possibly more efficient equilibrium beckons, the relative taxability of the old and new sectors will determine the likelihood of such a shift. In postcommunist Europe, such factors were influential in the creation of two general political-economic configurations: one where new economic activity is supported by the government and is common, and one where such support is lacking and new businesses are rare. Differences in relative taxability of new and old economic activity contribute to the prevalence of the first configuration in Eastern Europe, and the second in the former Soviet Union.

Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments

We initiate examination of the political boundaries of the firm by exploring the phenomenon of “businessman candidates”: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense.http://deepblue.lib.umich.edu/bitstream/2027.42/40119/3/wp733.pd

Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments

We initiate examination of the political boundaries of the firm by exploring the phenomenon of “businessman candidates”: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense.Businessman candidates, elections, citizen candidates, institutions, political economy

Government Control of the Media

We present a formal model of government control of the media to illuminate variation in media freedom across countries and over time, with particular application to less democratic states. The extent of media freedom depends critically on two variables: the mobilizing character of the government and the size of the advertising market. Media bias is greater and state ownership of the media more likely when the need for mobilization is large; however, the distinction between state and private media is smaller. Large advertising markets reduce media bias in both state and private media, but increase the incentive for the government to nationalize private media. We illustrate these arguments with a case study of media freedom in postcommunist Russia, where media bias has responded to the mobilizing needs of the Kremlin and government control over the media has grown in tandem with the size of the advertising market.Media, special-interest politics, nondemocratic politics

Businessman Candidates

Students of politics are familiar with two common forms of influence exercised by special interests over politicians: the provision of financial support to favored candidates during election campaigns, and the application of lobbying power when dealing with elected politicians. However, in certain political environments, representatives of special interests -- in particular, business owners and managers -- choose to run for office themselves, rather than simply relying on the political system to protect their interests. This paper addresses the question of why and in what circumstances businesses will follow this alternative path of influence. In so doing, it aims to contribute to an understanding of the role of institutional environment in determining the nature of special-interest politics. Expanding upon existing models of electoral competition and special-interest politics, we show that two features of weakly institutionalized environments contribute to the emergence of "businessman candidates." First, when political parties and other reputational mechanisms are weak, professional politicians will often be tempted to renege on promises made during an election campaign. In such an environment, businesses may prefer to run owners or managers of the firm for public office, knowing that the interests of such individuals will be aligned with those of the firm after the election. Second, when political competition for rents among businesses is large (due to the absence of checks on arbitrary exercise of political power, and perhaps due to a high concentration of economic power among businesses), having somebody in office who can protect the firm's interests is imperative. Coupled with professional politicians' commitment problem, this implies the prevalence of businessman candidates. We illustrate the results of our model by drawing upon the experience of a recent gubernatorial election in Krasnoyarskii Krai -- a large Siberian region dominated by two industrial interests, with the winner of the election the former general director of one of the two firms -- which in its particulars exemplifies a more general trend in Russian politicsspecial interest politics; businessman candidates; Russia

Taxability, elections, and government support of business activity

Politicians care about tax revenues in part because they pay for transfers or public goods which are important to voters, and which are thus important for the politician’s reelection. When economic sectors differ in their taxability, i.e. the degree to which tax revenues can be extracted by the state, politicians will thus have an incentive to allocate their support for business activity unevenly across sectors. Formalization of this idea shows that politicians will be more inclined to favor high-taxability sectors when transfers or public goods are highly valued by voters, but less likely to do so when a country’s overall tax capacity is high. Further, the allocation of support will depend on the relative size of the low- and high-taxability sectors, but not on the number of recipients of government transfers. Drawing upon a survey of firms in twenty-three postcommunist countries- where overall tax capacity is in many places quite low, differences in taxability across sectors is typically high, and government support for business activity is often lacking- the model’s predictions are shown to hold generally in countries with well-developed political rights and civil liberties, but only partially in the rest of the postcommunist world. Politicians in more democratic countries seem to be motivated by the electoral concerns central to this paper, while their counterparts in less democratic states appear to be motivated by revenue considerations for nonelectoral reasons. 2 1

Taxability, Elections, and Government Support of Business Activity

Politicians care about tax revenues in part because they pay for transfers or public goods which are important to voters, and which are therefore important for the politician’s reelection. When economic sectors differ in their taxability, i.e. the degree to which tax revenues can be extracted by the state, politicians will thus have an incentive to allocate their support for business activity unevenly across sectors. Formalization of this idea shows that politicians will be more inclined to favor high-taxability sectors when transfers or public goods are highly valued by voters, but less likely to do so when a country’s overall tax capacity is high. Further, the allocation of support will depend on the relative size of the low- and high-taxability sectors, but not on the number of recipients of government transfers. Drawing upon a survey of firms in twenty-three postcommunist countries - where overall tax capacity is in many places quite low, differences in taxability across sectors is typically high, and government support for business activity is often lacking - the model’s predictions are shown to hold generally in countries with well-developed political rights and civil liberties, but only partially in the rest of the postcommunist world. Politicians in more democratic countries seem to be motivated by the electoral concerns central to this paper, while their counterparts in less democratic states appear to be driven by revenue considerations for nonelectoral reasons.

Businessman Candidates

In immature democracies, businessmen run for public office to gain direct control over policy, whereas in mature democracies they typically rely on other means of influence. We develop a simple model to show that businessmen run for office only when two conditions hold. First, as in many immature democracies, institutions which make reneging on campaign promises costly must be poorly developed. In such environments, office holders have monopoly power which can be used to extract rents, and businessmen may run to capture those rents. Second, however, the returns to businessmen from policy influence must not be too large, as otherwise the endogenous rents from holding office draw professional politicians into the race, crowding out businessmen candidates. Analysis of data on Russian gubernatorial elections supports these predictions, showing that 1) businessman candidates are less likely in regions with high media freedom and government transparency, institutions which raise the cost of reneging on campaign promises, and 2) businessman candidates are less likely in regions where returns to policy influence (measured by regional resource abundance) are large, but only where media are unfree and government nontransparent.