Firm Characteristics and Influence on Government Rule-Making: theory and evidence

Abstract

An adversarial game is used to model the amount of influence a firm has over a government regulator, and its equilibrium level of regulation, as a function of firm fundamentals. The effective influence of a firm is identified as comprising both intrinsic and exerted components; where the latter involves distorting regulation via a transfer to the regulator. Understanding the source of a firm's high influence is found to be important for -among other things - predicting whether it faces higher or lower regulatory constraint than other firms. Data from the World Business Environment Survey provides strong evidence in support of model hypotheses across a wide range of government agents, countries, and regulatory areas. Of particular relevance to public debate, large firms are found to be more likely to be influential, but also more likely to experience regulatory constraint than smaller firms.Political Economy; Regulation; Influence