Cronyism in Business, Public Sector and Politics

Zudenkova, Galina (2011): Cronyism in Business, Public Sector and Politics.

Abstract

This paper contrasts the incentives for cronyism in business, the public sector and politics within an agency problem model with moral hazard. The analysis is focused on the institutional differences between private, public and political organizations. In business, when facing a residual claimant contract, a chief manager ends up with a relatively moderate first-best level of cronyism within a firm. The institutional framework of the public sector does not allow explicit contracting, which leads to a more severe cronyism problem within public organizations. Finally, it is shown that the nature of political appointments (such that the subordinate's reappointment is conditioned on the chief's re-election) together with implicit contracting makes political cronyism the most extreme case.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cronyism; Meritocracy; Manager; Bureaucrat; Politician.
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

References

Alesina, Alberto, and Guido Tabellini, 2007. "Bureaucrats or Politicians? Part I: A Single Policy Task," American Economic Review, 97, 169-179.

Alesina, Alberto, and Guido Tabellini, 2008. "Bureaucrats or Politicians? Part II: Multiple Policy Tasks," Journal of Public Economics, 92, 426-447.

Austen-Smith, David, and Jeffrey S. Banks, 1989. "Electoral Accountability and Incumbency," in P. C. Ordeshook, ed., Models of Strategic Choice in Politics. Ann Arbor MI: University of Michigan Press.

Banks, Jeffrey S., and Rangarajan K. Sundaram, 1993. "Adverse Selection and Moral Hazard in a Repeated Elections Model," in W. Barnett, M. Hinich, and N. Schofield, eds., Political Economy: Institutions, Information, Competition and Representation. New York: Cambridge University Press.

Banks, Jeffrey S., and Rangarajan K. Sundaram, 1996. "Electoral Accountability and Selection Effects," University of Rochester, mimeo.

Barro, Robert, 1973. "The Control of Politicians: An Economic Model," Public Choice, 14, 19-42.

Besley, Timothy, and Stephen Coate, 2003. "Elected versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, 1, 1176-1206.

Burkart, Mike, Fausto Panunzi, and Andrei Shleifer, 2003. "Family Firms," Journal of Finance, 58, 2167-2202.

Caselli, Francesco, and Nicola Gennaioli, 2006. "Dynastic Management," mimeo.

Chami, Ralph, 2001. "What's Different About Family Businesses?" mimeo.

Egorov, Georgy, and Konstantin Sonin, 2011. "Dictators and their Viziers: Endogenizing the Loyalty-Competence Trade-off," Journal of the European Economic Association, forthcoming.

Ferejohn, John, 1986. "Incumbent Performance and Electoral Control," Public Choice, 50, 5-26.

Kramarz, Francis, and David Thesmar, 2007. "Social Networks in the Boardroom," mimeo.

Levine, David K., Federico Weinschelbaum, and Felipe Zurita, 2010. "The Brother in Law Effect," International Economic Review, 51, 497-507.

Martins, Pedro S., 2010. "Cronyism," mimeo.

Maskin, Eric, and Jean Tirole, 2004. "The Politician and the Judge: Accountability in Government," American Economic Review, 94, 1034-1054.

Montgomery, James D., 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, 81, 1408-1418.

Persson, Torsten, Gérard Roland, and Guido Tabellini, 1997. "Separation of Powers and Political Accountability," Quarterly Journal of Economics, 112, 1163-1202.

Prendergast, Canice, and Robert Topel, 1996. "Favoritism in Organizations," Journal of Political Economy, 104, 958-978.

Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," Quarterly Journal of Economics, 100, 1169-1189.

Scoppa, Vincenzo, 2009. "Intergenerational Transfers of Public Sector Jobs: a Shred of Evidence on Nepotism," Public Choice, 141, 167-188.

Taylor, Curtis R., 2000. "The Old-Boy Network and the Young-Gun Effect," International Economic Review, 41, 871-891.