Towards a Political Theory of the Firm
Neoclassical theory assumes that firms have no power of fiat any different from ordinary market contracting, thus a fortiori no power to influence the rules of the game. In the real world, firms have such power. I argue that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a “Medici vicious circle,” where money is used to get political power and political power is used to make money.
I thank Mark Gertler, Gordon Hanson, Enrico Moretti, Tim Taylor for very useful comments and Steve Haber for educating me on the multiple ways in which Google lobbies. Financial support from the Stigler Center and from the George Rinder Research fund at the University of Chicago is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.