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Collective Actions of Firms: the Compensation of State and Market Failures or Rent-Seeking (the Case of Business Associations)

Priority areas of development: economics
The project has been carried out as part of the HSE Program of Fundamental Studies.

The subject of the study is Russian business associations, their internal structure, their activities and the relations with firms and the government agencies.

The purpose of the project is to analyze interest groups’ behavior in various institutional conditions and model business association activity in Russia’s transition economy.

The methodology of the study includes descriptive analysis, statistical analysis (in particular regression analysis), and mathematical modeling with the use of game theory.

The associate professor in Middlebury College’s Economics Department William Pyle[1], and the PhD student of the Columbia University Israel Marques[2] were foreign partners of the Institute for Industrial and Market Studies who participated in the project.

The project included the following components:
  • State-business relations in post-Soviet Russia are described within the framework of the theory of social order.
  • The experience of business state relations in different countries is analyzed. Emphasis was made on cooperation to improve regulation.
  • The factors that influence the choice of firm lobbying strategy are analyzed (including the influence of political environment); Emphasis is made on collective versus individual strategies.
  • The interaction between business associations and state officials is modeled.

Key results include:
  • Russia features a “fragile” version of the limited access order, which is close to the type of crisis predicted by the North, Wallace, Webb and Weingast framework. In this case, the conditions create opportunities for a shift from the current "fragile" limited access order to a "mature" state, which is characterized by the presence of relatively modern and well-developed public private organizations.
  • Direct lobbying requires some advantages such as personal connections. Companies that have problems with access to officials use associations more often. Firms that use direct lobbying experience higher risk of capture by officials than those that use just associations. The effectiveness of associations and direct contacts with officials turned out to be quite similar.
  • If the number of veto players in a region is higher firms use associations more often in that region. Conversely, where there are fewer veto players, direct lobbying is the more desired strategy
  • If the bargaining power of the officials in business state relations becomes stronger associations may start to produce goods of a more public, as opposed to club, nature however, this result depends on bureaucrats’ incentives (the costs of bribery and carrier concerns). Another solution shows that if officials have more bargaining power the associations may increase club goods production and rent seeking.
Policy recommendations include measures to:
  • limit the opportunities for using business associations for rent-seeking, as suggested by social order theory, and expanding opportunities to direct their activities towards compensating for state and market failures.
  • reform of the law enforcement system in order to reduce the pressure on business.
  • organize cooperation between business and government representatives in order to improve the regulatory environment; and make this cooperation more effective.