Working Paper: CEPR ID: DP16210
Authors: Dana Foarta; Steven Callander; Takuo Sugaya
Abstract: The operation of markets and of politics are in practice deeply intertwined. Political decisions set the rules of the game for market competition and, conversely, market competitors participate in and influence political decisions. We develop an integrated model to capture the circularity between the two domains. We show that a positive feedback loop emerges such that market power begets political power in a positive feedback loop, but that this feedback loop is bounded. With too much market power, the balance between politics and markets itself becomes lopsided and this drives a wedge between the interests of a policymaker and the dominant firm. Although such a wedge would seem pro-competitive, we show how it can exacerbate the static and dynamic inefficiency of market outcomes. More generally, our modeldemonstrates that intuitions about market competition can be upended when competition is intermediated by a strategic policymaker.
Keywords: market and political power; political influence; market competition; Arrow effect
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Power (L11) | Political Power (D72) |
| Political Power (D72) | Market Power (L11) |
| Market Power (L11) | Political Protection (P26) |
| Political Protection (P26) | Market Dominance (L11) |
| Market Power (exceeding threshold) (L12) | Reduction in Political Protection (P26) |
| Misalignment of Interests (L21) | Inefficiencies in Market Outcomes (D61) |
| Political Intervention (D72) | Reverse Arrow Effect (Y60) |
| Reverse Arrow Effect (Y60) | Investment Incentives for Leading Firm (F23) |
| Investment Incentives for Leading Firm (F23) | Technology Levels (O30) |