Rent-seeking Vs. Hazard-reducing Political Strategies: a Simple Theoretical Model
Abstract: In this paper, I develop a theoretical model to address the question of which firms invest more in political strategies. In particular, I examine whether it is stronger competitors (i.e., firms with greater market capabilities, the ability to succeed in market competition) or weaker firms that invest more in political strategies to reduce the hazards of public and private expropriation. Prior research has focused primarily on rent-seeking political strategy, arguing that weaker firms are more likely to use political strategies to seek refuge from competitive forces; however, when political strategy helps firms to safeguard their market production, intuition suggests that stronger competitors should stand to benefit from it. In this paper I develop a theoretical model that reveals how a firm’s market capabilities affect key tradeoffs in allocating resources between market and non-market activities (i.e., political strategies). My main finding is that, when political strategies are used to reduce the hazards of public and private expropriation, stronger competitors will invest more in political strategies than weaker firms. In extensions of the basic model, I also show that, when both rent-seeking and hazard-reducing political strategies are present, less capable firms invest in rent-seeking political strategies while more capable firms invest in hazard-reducing political strategies.
