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A government that hands out privileges can expect corruption
Posted By Matt Mitchell On January 25, 2013 @ 4:50 pm In Government-Granted Privilege | Comments Disabled
According to the Washington Post, the mafia is heavily involved  in Italy’s renewable energy market. This is not particularly surprising given that firms in that market compete on a manifestly uneven playing field.
In a market characterized by a genuinely level playing field—one in which no firm or industry benefits from government-granted privilege—the only way to profit is to offer something of value to customers. If you fail to create value for voluntarily paying customers, they won’t volunteer their money. It’s that simple.
But things are different when the playing field can be tilted through government-granted privileges . This is because when the playing field can be tilted, firms have an incentive to find some way to persuade the government to tilt it their way. And the most persuasive techniques aren’t always above board.
The problem is that objective standards for playing favorites are hard to come by. This can corrupt even well-intentioned programs that privilege particular behavior in the name of serving the general good.
Imagine you are a politician and you want to reward firms that specialize in renewable energy. How do you determine who makes the cut? What if you want to reward companies that securitize mortgages for low-income households. How do you decide whom to reward? Or say you want to bailout “systemically important” banks. Where do you draw the line between systemically important and systemically unimportant?
Without objective guideposts, subjective factors loom large: whom do you interact with the most? Whom have you known the longest? Which firms share your ideological perspective? Which are headquartered in your hometown?
Even the most well-intentioned of politicians are susceptible to these considerations because all humans are susceptible to these considerations. That’s why a slew of research  has found government-granted privileges are often associated with corruption. For example, in an examination  of 450 firms in 35 countries, economists Mara Faccio, Ronald Masulis, and John McConnell found that politically connected firms are more likely to be bailed out than non-connected firms. It’s possible that more deserving firms just happen to be politically connected, but this strains credulity. A more plausible explanation is that in the absence of an objective standard for dispensing privileges, politicians reward those they know.
And when that is the case, firms make it their business to get to know politicians. Just ask Angelo Mozilo, the politically ensconced former head of Countrywide Financial. Countrywide supplied the loans that were repackaged by the federally backed Fannie Mae. And since Countrywide’s business model  depended on the favor of politicians, Mozilo made sure he was in good standing with his benefactors. Under a program known internally as the “Friends of Angelo ” program, Countrywide offered favorable mortgage financing to the likes of Senate Banking Committee Chairman Christopher Dodd and Senate Budget Committee Chairman Kent Conrad.
The conventional route to profit is to please one’s customers. But when firms are able to profit by pleasing politicians, they will do whatever it takes to please politicians. Which brings us back to Italy and renewables. The current investigation (known as operation Eolo after the Greek god of wind) first bore fruit in 2010  when eight people were arrested for bribing officials with cash and luxury cars. Armed with more evidence, officials have now arrested another dozen crime bosses.
It is good, of course, to have police who investigate these matters. But a far simpler, equitable, and efficient solution is to create a truly level playing field for business. When politicians cannot tilt the playing field in favor of particular firms or industries, businesses have nothing to gain from bribery and connections.
Put away the honey jar and you won’t have an ant problem.
Article printed from Neighborhood Effects: http://neighborhoodeffects.mercatus.org
URL to article: http://neighborhoodeffects.mercatus.org/2013/01/25/a-government-that-hands-out-privileges-can-expect-corruption/
URLs in this post:
 mafia is heavily involved: http://www.washingtonpost.com/world/europe/sting-operations-reveal-mafia-involvement-in-renewable-energy/2013/01/22/67388504-5f39-11e2-9dc9-bca76dd777b8_story.html?hpid=z2
 privileges: http://mercatus.org/publication/beyond-bailouts-what-cronyism
 research: http://mercatus.org/sites/default/files/The_Pathology_of_Privilege-Final_2.pdf
 examination: http://www.aeaweb.org/assa/2006/0107_1430_1103.pdf
 Countrywide’s business model: http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Financial/dp/1250008794
 Friends of Angelo: http://en.wikipedia.org/wiki/Countrywide_financial_political_loan_scandal
 bore fruit in 2010: http://www.telegraph.co.uk/earth/energy/renewableenergy/7981737/Mafia-cash-in-on-lucrative-EU-wind-farm-handouts-especially-in-Sicily.html
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