New evidence on indirect lobbying
In new research (DellaVigna et al., 2014) we look at a different channel for the conflict of interest for politicians with business holdings. Specifically, we study whether third parties try to curry favour with conflicted politicians by shifting their business towards firms controlled by a politician. The politician benefits financially from the increased business, and the 3rd parties expect favourable regulation in exchange. We label this channel, involving lobbying through business proxies and which includes not received much attention in the literature, as ‘indirect lobbying’.
Figure 1 illustrates how this channel differs from the literature. The direct lobbying channel involves firms lobbying politicians directly for regulation. The businessman-politician channel pertains to the case where politicians are stakeholders in a company. These politicians reap the advantages of political decisions although firm revenue. The indirect lobbying channel we propose operates through business proxies. Firms provide favours to politicians by directing business orders to the firm controlled by the politician. This channel, just like the second channel, only applies when rules usually do not forbid the concentration of political and business interests.
Figure 1 . Conflict-of-interest channels
To supply evidence upon this third channel, we look at a particularly egregious case of concentration of business and political interests, i.e. Italy because the mid 1990s. In the Spring of 1994, Silvio Berlusconi, previously an effective entrepreneur and owner of Italy’s main private television network, was elected prime minister. Unlike the united states, Italy does not have any rules forbidding the concentration in a single person of business interest and prominent political positions, and doesn’t have the tradition of blind trusts for politicians with interests in companies. As such, Berlusconi retained control of his business holdings in the media, inducing a conflict of interest along with his role as prime minister.
In this context, the indirect lobbying distortions take the proper execution of advertising decisions. The Italian broadcast television is dominated by two groups, the general public broadcasting corporation (RAI) and an exclusive network, Mediaset, controlled by Berlusconi. The profitability of the three Mediaset channels, which are free-to-air, depends upon advertising revenue. The indirect lobbying channel posits that firms try to curry favours with the federal government by shifting a few of their advertising from public channels to Berlusconi’s channels when Berlusconi is in power.
While our analysis is targeted on Italy, the indirect lobbying channel identified here applies broadly, considering that politicians have major business holdings in a number of other countries. Occasionally, the business enterprise interests are in the media, as in Italy. For instance, Thaksin Shinawatra, prime minister of Thailand between 2001 to 2006, owned the country’s largest free-to-air television, and Sebastián Piñera, former president of Chile, owned Chile’s most influential TV station. Additional for example Andrej Babis, leader of Czech Republic’s second largest party and owner of multiple newspapers and two national TV channels and, in america, Michael R. Bloomberg, mayor of NY from 2002 to 2013 and main shareholder of the news headlines conglomerate Bloomberg LP. In other cases, the holdings are beyond your media sector, as regarding Nitin Gadkari, leader of India’s opposition party BJP between 2010 and 2013 and main shareholder of the Purti group, with interests in the energy, sugar, and alcohol sectors, amongst others.
A style of the advertising market
To illustrate the indirect lobbying channel inside our context, we sketch a style of the advertising market. We consider two types of firms, regulated and unregulated, who must determine how to allocate their advertisements between your two networks. As well as the economic benefits connected with advertising, regulated firms get a political reap the benefits of advertising on Berlusconi’s network when he’s in power. When Berlusconi involves power, demand to promote on his network thus increases. This shift popular induces a rise in the cost of advertising in Berlusconi’s channels in addition to a change in the composition of advertising spending. Regulated companies shift spending towards Berlusconi’s channels, while unregulated firms do otherwise (given the purchase price change). This quid-pro-quo escalates the profits of Berlusconi’s companies and lowers the gains of the competing public network.
Evidence from sector-level and firm-level data
To check the predictions of the model, we use sector-level and firm-level data by Nielsen on quarterly advertising expenditure by firm and media outlet between 1993 and 2009. We then compare the advertising shelling out for the various TV channels when Berlusconi is in power versus when he’s not. In this respect, we exploit the repeated switches in political balance. Berlusconi was prime minister in 1994, between 2001 and 2006, and from 2008 to the finish of our sample. Further, to check the predictions on regulation, we conduct a survey of Italian economists eliciting measures of regulation by industry, and utilize the responses to construct a continuing measure of the amount of regulation in a sector.
In the first the main analysis, we compare outcomes in the advertising market during periods where Berlusconi is in capacity to periods when he’s not in power. Figure 2 shows the primary result. In keeping with the predictions, advertising shelling out for Mediaset, relative to the general public network, is higher when Berlusconi is in power (indicated with the shaded areas). The effect is actually visible for both second and third Berlusconi government (the estimates for the first government are noisier given its short duration). The effect is driven by a rise in advertising prices on Mediaset and a corresponding decrease in prices on the general public network. Consistent with a comparatively inelastic way to obtain advertising slots, we find no changes in the amount of advertisements on both networks.
Figure 2 . Share of advertising on Berlusconi’s televisions
Building upon this evidence, we conduct a difference-in-difference analysis, comparing more regulated industries to less regulated industries. Figure 3 shows graphically the primary result. In keeping with the predictions of the model, we find that regulated sectors (continuous line), in accordance with unregulated sectors (dotted line), spend more on Mediaset, in accordance with the general public network, when Berlusconi is in power. As opposed to the time-series evidence, that was driven by a cost response, this shift is principally driven by a quantity response, with regulated sectors, in accordance with unregulated sectors, purchasing more slots on Mediaset, in accordance with the general public network, when Berlusconi is in power. This effect is stronger for the peak-hours programming, which is of higher value to the networks.
Figure 3 . Share of advertising on Berlusconi’s televisions, by regulation index in the market
Finally, we exploit an integral benefit of our setting. We utilize the simple economics of TV advertising slots, given a set way to obtain seconds of advertising, to back out the estimated profits accruing to Berlusconi’s company because of the quid pro quo. We estimate a profit increase of over €1 billion over the nine years of Berlusconi government, accounting for 20% of the marketplace capitalisation of Mediaset in 1997. Subsequently, this provides a way of measuring the expected returns from favourable regulation for the regulated firms of €2 billion over nine years. The large magnitudes indicate the first-order role played by the indirect lobbying channel.
Our findings have important policy implications. We offer yet another rationale for rules on conflict of interest just like the ones set up in the present day US congress, with a tradition of blind trusts for politicians with interests in companies. The original rationale for such separation is in order to avoid self-serving legislation (the businessman-politician channel). We explain that, furthermore, the concentration of business and political interests permits alternative types of lobbying – through business purchases – which are harder to monitor and regulate.
This paper documents a significant link between your two literatures. In the current presence of businessmen-politicians, the lobbying process may take an indirect route. Firms longing for regulatory favours may lobby the politician through business purchases towards the firm controlled by the politician, who advantages from the additional revenue. We offer evidence in keeping with this channel in Italy, where we exploit the detailed advertising data, the frequent switches in power, and variation in propensity for regulation. We show that the magnitudes of the effect have become sizeable, in the region of vast amounts of euros. Our results suggest an additional rationale for rules dictating a separation between business and political interests.
As the paper has centered on a particular setting – advertising markets in Italy – we stress that the channel accessible pertains to all cases where there exists a confluence between business and political decision-making. In a classical paper on Suharto (Fisman 2001), for instance, the returns to firms near to the dictator surely reflect the original favouritism channel, but likely also capture the indirect lobbying channel highlighted in this paper. To begin with, our findings will tend to be relevant in other advertising markets in countries where media outlets are owned by powerful families which, as Djankov et. al. (2003) document, is a common situation. We hope that future research will investigate more such settings.
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