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Businessman Candidates
Scott Gehlbach, Konstantin Sonin, and Ekaterina Zhuravskaya
∗
November 2007
Abstract
In immature democracies, businessmen often run for public office to gain direct con-
trol over policy; in mature democracies politics is dominated instead by professional
politicians. This paper presents a simple model to explain this difference in political se-
lection. When institutions that make reneging on campaign promises costly are strong,
as is typical in mature democracies, policy makers are constrained by promises made
to be elected, and businessmen gain little from holding office themselves. When such
institutions are weak, as in many immature democracies, policy makers have monopoly
power that can be used to extract rents, and businessmen may run to capture these
rents. Paradoxically, in the latter case businessmen run only if rents from holding
office are not too large, as otherwise professional politicians crowd out businessman
candidates. Analysis of data on all Russian gubernatorial elections from 1991 to 2005
supports the model’s predictions. Businessman candidates emerge in regions with low
media freedom and government transparency, institutions that raise the cost of reneg-
ing on campaign promises. Among regions with weak institutions, businessmen are less
likely to run where there are large rents from holding office, as measured by regional
resource abundance.
∗
Gehlbach: Department of Political Science, UW Madison, 110 North Hall, 1050 Bascom Mall, Madison,
WI 53706, (608) 263-2391, fax (608) 265-2663, gehlbach@polisci.wisc.edu. Sonin: New Economic School,
CEFIR, and CEPR, Nakhimovskii Prospekt 47, 117418 Moscow, Russia, (7 495) 129-3236, fax (7 495) 129-
3722, ksonin@nes.ru. Zhuravskaya: New Economic School, CEFIR, and CEPR, Nakhimovskii Prospekt
47, 117418 Moscow, Russia, (7 495) 129-3236, fax (7 495) 129-3722, ezhuravskaya@cefir.ru. We thank Jim
Adams, Jim Alt, Lee Benham, Jen Brick, Barry Burden, David Canon, Michael Carter, Tim Colton, Ian
Coxhead, John Coleman, John Duggan, Johnny Easter, Guido Friebel, Sergei Guriev, Charles Franklin, Ted
Gerber, Kathie Hendley, Yoshiko Herrera, Paul Hutchcroft, Nikolai Petrov, Gerard Roland, Jim Robinson,
Caroline Savage, Alexandra Suslina, Dan Treisman, Murray Weidenbaum, and Dave Weimer for many helpful
comments. Much useful feedback was received from seminar and conference participants at Harvard, UC
Berkeley, UW Madison, Washington University, and meetings of the European Economic Association, the
Game Theory Congress, the International Society for New Institutional Economics, the Midwest Political
Science Association, the North American Econometric Society, and the Public Choice Society.
What determines the nature and extent of firm influence in the political arena? Most
attempts to answer this question have focused on strategies employed by special-interest
groups in mature democracies, including the lobbying of elected officials and provision of
campaign finance to professional politicians (e.g., Grossman and Helpman, 2001). But in
many immature democracies, businessmen often employ an alternative strategy, running for
public office themselves to further their business interests despite high opportunity costs of
doing so. What accounts for this difference in “political selection” (Besley, 2005)? How
are public policy and the distribution of rents among politicians and firms affected by the
presence of “businessman candidates”? We address these questions in this paper, focusing
on the quality of democratic institutions and its consequences for the political participation
of businessmen.
In the contemporary world, prominent examples of businessmen in politics include the
“tycoons” who dominated party politics in Thailand under Thaksin Shinawatra, the repre-
sentatives of “family conglomerates” who have controlled Philippine politics since the colonial
era, and the “oligarchs” who have held political office at all levels of government in Rus-
sia and Ukraine.
1
Such behavior is much less common in established democracies, where
businessmen may occasionally run for office but do not generally do so to further their busi-
ness interests.
2
The situation, however, was once different in many countries that today
have mature democratic institutions. For example, the late-nineteenth-century Reichstag
was populated to a large extent by businessmen, railroad magnates frequently held public
office in the nineteenth-century U.S. (Leland Stanford is only the best-known example), and
American cities were governed for decades before the First World War by local business
1
On Thailand, see Laothamatas (1988) and Bunkanwanicha and Wiwattanakantang (2006); on the Philip-
pines, Hutchcroft (1991, 1998); Gutierrez (1994); Coronel et al. (2004); on Russia, Barnes (2003), Orttung
(2004), Hale (2005), and Kryshtanovskaya (2005); and on Ukraine, Puglisi (2003) and
˚
Aslund (2005).
2
Consistent with this observation, and with our general theoretical argument, Fisman et al. (2006) esti-
mate the value of business connections to U.S. Vice President Richard Cheney (who headed the oil-services
company Halliburton prior to being elected vice president) to be zero, suggesting that U.S. political institu-
tions are comparatively effective in preventing office holders from exploiting their position to further their
business interests.
1
elites.
3
Common to all these examples—and to immature democracies more generally—is the
weakness of institutions that hold politicians accountable to voters, and in particular, that
raise the cost to office holders of reneging on campaign promises (Persson and Tabellini, 2000;
Robinson and Verdier, 2002; Djankov et al., 2003; Keefer and Vlaicu, 2005; Keefer, 2006).
For example, media freedom and government transparency are both essential for citizens to
be able to identify the relationship between electoral promises and actions once in office, and
so to punish office holders who have broken campaign promises (e.g., Sen, 1999; Reinikka
and Svensson, 2005; Besley and Prat, 2006; Gentzkow, 2006; Gentzkow and Shapiro, 2006).
Strong political parties serve a similar function, acting as reputational mechanisms that
provide disincentives for individual politicians to behave opportunistically (e.g., Alesina and
Spear, 1988; Cox and McCubbins, 1994; Aldrich, 1995). The weakness of such institutions
in immature democracies is the key to understanding the phenomenon and consequences of
businessman candidacy.
4
We explore the effect of democratic institutions on businessman candidacy with a simple
model of political selection. As in the “citizen candidate” models of Osborne and Slivinski
(1996) and Besley and Coate (1997), entry in our model is endogenous: both professional
politicians and businessmen may enter the race. In a departure from those models, we
compare institutional environments by exploring not only the case where campaign promises
are not binding (the typical case in the citizen-candidate literature), but also the case in
which they are. At stake is a policy over which businessmen have conflicting preferences.
Businessmen can influence policy in three ways: by lobbying the election winner for favorable
policy treatment (but only when the election winner is unconstrained by electoral promises),
3
Sheehan (1968) provides an account of German businessmen in the 19th-century Reichstag. Crandall
(1950) discusses the political participation of railroad barons. Various authors have emphasized the business
background of 19th-century American urban political elites; see, e.g., Dahl (1961); Bradley and Zald (1965);
Pessen (1972); Kipp III (1977).
4
One prominent example of a businessman candidate in the contemporary world actually comes from a
mature democracy. Italy’s Silvio Berlusconi is the exception that proves the rule: Berlusconi was able to
maintain control of his media empire even while serving as Italy’s prime minister. The apparent conflict of
interest has often been characterized as a threat to Italy’s democratic institutions (e.g., Blatmann, 2003).
2
by providing campaign finance ex-ante (a strategy useful only when campaign promises are
binding), or by running for election.
The key assumption of the model is that a businessman’s opportunity cost of running
for public office is higher than a professional politician’s. Unlike politicians, businessmen
also have businesses to run while campaigning for public office. Campaigning requires enor-
mous time and effort, both of which must be diverted from business. Studies of U.S. politics
suggest that such opportunity costs can be large enough to bias representation in state leg-
islatures against the Republican Party, as potential Republican candidates are more likely
than potential Democratic candidates to have lucrative careers in business and other profes-
sions (Fiorina, 1994, 1999; see also Caselli and Morelli, 2004). Moreover, businessmen may
need to spend additional time and money to overcome any advantage in political skill enjoyed
by professional politicians (Diermeier, Keane and Merlo, 2005). Given these considerations,
the rents from holding office necessary for a businessman to run are greater than those for a
professional politician to participate in the race.
5
The model produces three key results. First, businessmen do not run for public office
when campaign promises are binding, as the logic of political competition forces both busi-
nessman and politician to adopt the same electoral platform, regardless of whether or not
campaign finance plays a role in the race. Given differences in opportunity costs of electoral
participation, businessmen sit out the race and pay professional politicians to run in their
place. Second, businessmen may run for public office when campaign promises are not bind-
ing. In this case, policy is chosen by an election winner unconstrained by electoral promises.
The winner may, of course, be lobbied by businessmen, so businessmen run both to save on
lobbying costs and to acquire additional rents by being on the receiving end of the lobbying
process. In equilibrium, policy is the same regardless of the election winner, though the
5
The following example may help to make the point: Alexander Khloponin, CEO of the largest Rus-
sian nickel producer, Norilsk Nickel, was elected governor of Taimyr Autonomous Okrug in February 2001,
and subsequently elected governor of Krasnoyarsk Krai in September 2002. After Khloponin entered poli-
tics, Interros—Norilsk Nickel’s holding company—was compelled to send Mikhail Prokhorov, one of its two
controlling shareholders, to the city of Norilsk to oversee day-to-day management. For Interros, the move
represented a serious diversion of talent: managerial resources are especially scarce in contemporary Russia.
3
distribution of rents is not. Third, when campaign promises are not binding, businessman
candidates are less likely when their returns from policy influence are high. This paradoxical
result follows from the nature of policy choice when campaign promises are not binding. With
the election winner in a position to earn rents by granting or denying favors to businessmen,
there is a gain from holding office for professional politicians as well as businessmen. Given
professional politicians’ lower opportunity costs of running, businessmen are thus crowded
out of the race when returns from policy influence are large.
An important implication of this analysis is that policy bias does not directly result
from the holding of public office by businessmen. Rather, public policy and the political
participation of businessmen are jointly determined by the institutional environment. The
lesson is general. When institutions that hold elected officials accountable to voters are
strong—as is often the case in mature democracies—then the ability of special interests
to influence public policy is limited, and there is little incentive for representatives of those
interests to run for public office. In contrast, when these institutions are weak—as is typically
the case in immature democracies—then there are rents to be gained from holding public
office, and representatives of special interests may run for office to capture those rents.
We test the predictions of our model using a comprehensive database on the business
affiliation of all Russian gubernatorial candidates between 1991 and 2005. Russia provides
an ideal setting for such a test: political institutions are generally weak, implying favor-
able conditions for businessman candidacy, yet there is substantial variation across regions
in both the quality of these institutions and in the potential returns to policy influence.
Regarding the first two predictions, we find that two measures of the regional institutional
environment—media freedom and government transparency—are negatively associated with
the likelihood of businessman candidacy. As both media freedom and government trans-
parency raise the cost of reneging on campaign promises, we interpret this as support for the
hypothesis that businessmen candidates are less likely when campaign promises are binding.
The strength of political parties does not have a robust significant effect on businessman
4
candidacy, but the sign of the effect is always as predicted. Regarding the third prediction,
we find evidence of a crowding-out effect in the presence of weak institutions: returns from
policy influence, proxied by the share of regional employment in resource extraction, are
negatively associated with the incidence of businessman candidacy when media are unfree
and government nontransparent.
In our model, a businessman’s decision to run for office depends on whether his opportu-
nity cost of running is offset by gain from control over the policy process, a tradeoff affected
by the institutional environment (Bartels and Brady, 2003; Besley, Pande and Rao, 2006).
Our work thus contributes to the vast literature on the impact of institutions on economic
and political outcomes (e.g., Shepsle, 1979; Shepsle and Weingast, 1984; North and Weingast,
1989; Knack and Keefer, 1995; La Porta et al., 1997, 1999; Acemoglu, Johnson and Robin-
son, 2001, 2002; Bueno de Mesquita et al., 2003; Glaeser et al., 2004; Persson and Tabellini,
2005). In a related work, Li, Meng and Zhang (2006) examine the influence of market, rather
than political, institutions on participation by Chinese entrepreneurs in politics.
Our study also builds on a large body of recent work on “politically connected firms”
(e.g., Fisman, 2001; Johnson and Mitton, 2003; Bertrand et al., 2005; Khwaja and Mian,
2005; Faccio, 2006; Faccio, Masulis and McConnell, 2006), though our approach differs in two
ways from that in much of the literature. First, we treat political connections (of a particular
type) as endogenous, exploring both theoretically and empirically the institutional conditions
under which those connections emerge. Second, we show that it is not political connections
per se but the underlying institutional environment that determines whether policy is biased
toward the preferences of politically connected businessmen.
Finally, our analysis has parallels in the theory of the firm (Coase, 1937; Williamson,
1975, 1985; Klein, Crawford and Alchian, 1978; Grossman and Hart, 1986; Hart and Moore,
1990) and its application to politics (Shleifer and Vishny, 1994). The focus here is on the
political boundaries of the firm: the choice between running for public office oneself and
paying a politician to run in one’s place.
5
The paper is organized as follows. In Section 1 we present a simple model of political
selection to identify the determinants and consequences of businessman candidacy. We test
the predictions of this model using data from Russian gubernatorial elections in Section 2.
We offer concluding thoughts in Section 3.
1 A Simple Model of Political Selection with Business-
man Candidates
In this section we present a simple model to explore the impact of democratic institutions
on the political participation of businessmen. We assume a political economy populated by
a large but finite number of businessmen, a large but finite number of politicians, and a
continuum of voters. Both businessmen and politicians are potentially candidates for office;
voters are not. At issue in the election are policies that are important to the business-
men, and over which the businessmen have conflicting preferences. Politicians, in contrast
to businessmen, are indifferent over the set of policies, as in the vast majority of models
of special-interest politics that are situated in an electoral context (see, e.g., Persson and
Tabellini, 2000; Grossman and Helpman, 2001). The assumption that businessmen but not
politicians have a direct stake in the policy implemented after the election may be easily
derived from first principles by assuming that businessmen and politicians each maximize
rents, but that businessmen have businesses whereas politicians do not.
Both businessmen and politicians desire holding office for its own sake, and receive an
exogenous payoff (formal compensation) of v if they win the election. Depending on the
institutional environment, they may also value holding office for the opportunity it provides
to earn rents through control of the policy process, a point to which we return below. Busi-
nessmen and politicians differ in their opportunity cost of running, where any businessman
incurs a cost κ > 0 if he runs, whereas any politician incurs a cost of δ > 0 if he runs. The
key assumption of the model is that running for office is more costly for businessmen than for
6
professional politicians. We assume in particular that δ <
v
2
< κ. This assumption implies
that if only the exogenous payoff from holding office is at stake, then a politician prefers to
enter a race that he has a 50-50 chance of winning, but a businessman does not.
6
We assume some arbitrary policy space X, refer to any individual policy as x, and
denote the utility that any businessman i receives from policy x as u
i
(x). To assure a
unique outcome to the lobbying game described below, we assume that for all subsets B
of the set of all businessmen from which no more than one businessman is missing, the
solution to max
x
P
i∈B
u
i
(x) is uniquely defined. In addition, we assume that there is a
conflict of interest among businessmen, in the sense that any policy that neglects the interests
of only one businessman makes all other businessmen weakly better off, relative to the
policy implemented when the interests of all businessmen are taken into account. Formally,
we say that for each businessman i and j, with i 6= j, u
i
(x
−j
) ≥ u
i
(¯x), where: x
−j
≡
arg max
x
P
i6=j
u
i
(x) and ¯x ≡ arg max
x
P
i
u
i
(x).
Voters have preferences over policies in X and cast their ballot for the candidate whose
expected policy choice they most prefer. If there is more than one such candidate then voters
decide among those candidates using an equal-probability rule; if there is only one candidate
in the race then that candidate wins by default. To capture the idea that businessmen have
preferences that may diverge from those of the general population, we assume that voters
have identical preferences with most-preferred policy
ˆ
x 6=
¯
x. For concreteness, one might
think of x as a vector of subsidies to each businessman that must be financed through tax
increases or cuts in public-goods provision. We assume that voting is by plurality rule,
though given the assumption of voter homogeneity a variety of other voting rules produce
the same outcome.
Our assumption of voter homogeneity departs from many models of electoral competition,
though is typical of models of political agency. In our setting, equilibrium when campaign
6
We follow the citizen-candidate literature in assuming that opportunity costs are for running, not holding,
office. However, all of our results go through if we assume that that there is also an opportunity cost to
holding office that is at least as large for businessmen as it is for politicians.
7
promises are binding can be assured either by assuming a low-dimensional policy space and
arbitrarily restricting entry, or by assuming sufficient homogeneity of voter preferences. (At
the expense of additional notation, we could assume some heterogeneity of voter preferences,
as when employees of businessmen have different preferences over policy than non-employees.
An equilibrium would then exist and our results hold so long as there is sufficient homogeneity
to assure a unique policy in the core; see, e.g., Austen-Smith and Banks, 1999.) We adopt
the latter assumption, given the importance to our argument of policy conflict among many
businessmen—and so a high-dimensional policy space—and entry by an arbitrary number
of candidates. In essence, we choose to focus on the policy conflict that is most important
to our setting: competition among businessmen for rents, where any particular businessman
may—but need not—have interests that run counter to those of the general public.
Following candidate entry and prior to voting, each candidate—businessman or profes-
sional politician—announces a policy to be implemented after the election. For now, we
ignore the potential role of campaign finance, assuming that voters have fixed policy pref-
erences. In Section 1.2 below, we allow for the possibility that businessmen may influence
voter preferences and thus the policies adopted during the electoral campaign through the
provision of campaign finance.
We are interested in the relationship between the political participation of businessmen
and institutions that make reneging on campaign promises costly. To explore this relation-
ship, we consider two versions of the model. In the first version, we assume that campaign
promises are binding, so that the election winner implements the policy announced during
the campaign. In the second version, we assume that campaign promises are not binding.
7
In this case, the election winner may costlessly ignore promises made during the election
campaign, and may choose any policy x ∈ X. Businessmen may attempt to influence this
7
We obtain identical results from a “convexified” version of the model that is more general but somewhat
less transparent than that presented here. In this alternative version of the model, after the election but
prior to the choice of policy, a random variable σ ∈
σ
E
, σ
N
is realized, such that if σ = σ
E
, then the
policy promised by the election winner is implemented, whereas if σ = σ
N
the campaign promise may be
costlessly ignored.
8
policy choice through the promise of contributions. As is standard in the political-economy
literature, we model this lobbying process as a “menu auction” as in Bernheim and Whinston
(1986) and Grossman and Helpman (1994). In particular, in the lobbying game each busi-
nessman (with the exception of the winning candidate in the event that a businessman is the
election winner) provides a contribution schedule C
i
(x), which offers a particular contribu-
tion for every policy x ∈ X. Following receipt of the schedules, the election winner chooses
x. We assume that the preferences of businessmen over final outcomes can be represented
as the sum of u
i
(x) and of monetary contributions from lobbying; these contributions are
negative for a businessman who does not hold office and provides nonzero contributions in
equilibrium, and positive for a businessman who holds office and receives nonzero contribu-
tions in equilibrium. Politicians do not have preferences over policy and, therefore, if elected,
choose policy to maximize lobbying contributions from businessmen.
8
It is important to note that we rule out binding contracts between electoral candidates
and businessmen over the policy implemented in the case of the candidate’s victory. If
campaign promises are binding, then any promise to a businessman to pursue some policy
after the election is not credible if some other policy must be promised to voters to be elected.
If campaign promises are not binding, then once in power the winner can renege on promises
to businessmen just as easily as he can on those to voters.
9
All elements of the game are common knowledge. The timing of events is as follows:
1. Entry: Simultaneously and independently, the businessmen and politicians decide
8
An important question is whether politicians and businessmen can make credible promises in the lobbying
game even when campaign promises are not binding. We assume that such commitment is possible, treating
post-election lobbying as a spot-market transaction (in which political favors are provided in return for
monetary compensation) with few dynamic considerations, one roughly akin to the exchange of money for
goods in a retail environment. Campaign promises, in contrast, typically are made months before policy is
implemented, so that when democratic institutions are weak there is a strong incentive for elected officials
to renege on their promises. Besley and Coate (2001) adopt the identical framework, modeling post-election
decision making when campaign promises are not binding as a menu auction `a la Grossman and Helpman.
9
The following example is illustrative: In early 2004, a businesswoman from the Russian region of Ryazan
gave $1.7 million to gubernatorial candidate Georgii Shpack in return for a written promise to be named
vice governor if the candidate was elected. Shpack won the election, but reneged on this campaign promise
by choosing a different vice-governor. Lacking other means of enforcing her agreement with the governor,
the businesswoman filed suit for breach of contract. Not surprisingly, the suit was ultimately withdrawn.
See Moscow Times, February 16, 2005; Kommersant, March 5, 2005.
9
whether or not to enter the race.
2. Platform choice: Each candidate promises to implement some policy x ∈ X if elected.
3. Election: Voters cast their ballot for the candidate whose expected policy choice they
most prefer.
4. Policy choice: In the model with binding campaign promises, the winning candidate
implements the policy promised during the campaign. In the model with no commit-
ment to campaign promises, policy is chosen through a lobbying process modeled as a
menu auction.
In Section 1.2 we introduce an additional campaign-finance stage following entry and prior
to platform choice.
1.1 Equilibrium
We solve for subgame-perfect equilibria of each of the two versions of the model: 1) the model
with binding campaign promises, and 2) the model without binding campaign promises. As
we discuss below, we restrict attention to equilibria in which contribution schedules are
compensating.
Equilibrium in model with binding campaign promises
When campaign promises are binding, the equilibrium outcome is easy to derive. Clearly, if
there are two or more candidates, then any candidate promises to implement voters’ most-
preferred policy
ˆ
x. If every candidate has committed to
ˆ
x, then any deviation to some other
platform results in that candidate’s losing with certainty. In contrast, if some candidate has
not committed to
ˆ
x, then at least one candidate could increase his probability of winning
by deviating to
ˆ
x. This implies that every candidate who has entered wins with equal
probability, and enough candidates enter to exhaust the exogenous rent from holding office
v. The assumption that
v
2
> δ implies that an equilibrium always exists, and that in any
equilibrium there are at least two candidates, as otherwise some politician would enter to
10
have a chance to win v. In particular, given that at least one politician enters, the number
of candidates N
b
in equilibrium (where the subscript b refers to binding campaign promises)
satisfies
v
δ
− 1 ≤ N
b
≤
v
δ
.
The inequality on the left says that no additional politician wants to enter the race, given
that N
b
candidates enter. Note that if no politician wants to enter, then because κ > δ
no businessman wants to enter either. The inequality on the right says that some politician
finds it worthwhile to enter the race if N
b
−1 other candidates also enter. (Below we consider
the question of whether a businessman candidate would want to stay in the race if there are
N
b
− 1 other candidates.) Intuitively, the larger the exogenous payoff from holding office and
the smaller the cost of entry, the higher the number of candidates in equilibrium.
We are interested in the conditions under which a businessman would choose to enter
the race as a candidate. The following proposition establishes that the only circumstance in
which a businessman could be in the race when campaign promises are binding is when he
is one of two candidates. As the same policy
ˆ
x is adopted so long as there is some political
competition, a businessman in a race with at least three candidates could save the cost of
entry and receive the same policy by instead not entering.
Proposition 1. When campaign promises are binding, the only possible equilibrium with a
businessman candidate is a two-candidate equilibrium.
Proof. We have already established that there is no one-candidate equilibrium. To see that
there is no equilibrium with N ≥ 3 candidates, one of which is some businessman i, assume
otherwise. Then the payoff for businessman i in equilibrium is u
i
(
ˆ
x) +
v
N
− κ. In contrast,
if businessman i deviates by not entering his payoff is u
i
(
ˆ
x). As κ >
v
2
by assumption, the
payoff from deviation is greater. Thus, there is no equilibrium with N ≥ 3 candidates, and
the only possible equilibrium with a businessman candidate is a two-candidate equilibrium.
Q.E.D.
11
A two-candidate equilibrium with a businessman candidate may exist, even though the
exogenous rent from holding office is not high enough to justify the opportunity cost of
running for a businessman. To see this, observe that the payoff for businessman i in such
an equilibrium is u
i
(
ˆ
x) +
v
2
− κ. In contrast, businessman i’s payoff from deviating by not
entering is equal to his utility from the policy most preferred by the other candidate: if
businessman i does not enter the other candidate runs alone and so is unconstrained in his
choice of policy. Let x
0
refer to this policy. Then the payoff for businessman i in equilibrium
is greater than the payoff from deviating so long as κ ≤ [u
i
(
ˆ
x) − u
i
(x
0
)] +
v
2
, which is the
case so long as businessman i’s preference for
ˆ
x over x
0
is sufficiently great.
Any two-candidate equilibrium with a businessman candidate, however, is inefficient.
The only reason the businessman stays in the race is his fear of the policy that would be
implemented if he were to leave the other candidate unopposed. But any other candidate
could play the same role, introducing political competition and forcing policy to
ˆ
x. Fur-
ther, a politician could play this role more cheaply than the businessman could, because by
assumption the opportunity cost of running is less for politicians. Thus, the businessman
could agree with a politician for the politician to enter in his place. As the businessman
saves κ −
v
2
by having somebody else run in his place, in principle he would be willing to
pay the politician to do so. However, even in the absence of such an agreement the deal
will stick: the politician will want to enter given that the businessman does not because his
expected payoff from entry
v
2
is greater than the opportunity cost of running δ.
Proposition 2. When campaign promises are binding, any equilibrium with a businessman
candidate is Pareto dominated by a two-candidate equilibrium with no businessman candi-
dates.
Proof. See above.
Propositions 1 and 2 together suggest that businessman candidates should be unlikely in
the presence of institutions that make reneging on campaign promises costly.
12
Equilibrium in model without binding campaign promises
When campaign promises are not binding, the election winner is unconstrained by his cam-
paign promise. Policy is thus chosen after the election through a menu auction, where each
businessman i (but the election winner, if a businessman) provides the election winner with
a contribution schedule C
i
(x), which offers a particular contribution for every policy x ∈ X.
We restrict attention to equilibria in which contribution schedules are compensating, i.e.,
those for which differences in promised contributions reflect differences in the businessman’s
utility from different policies, subject to the constraint that contributions are not negative.
Bernheim and Whinston (1986) show that any compensating equilibrium of a menu-auction
game is jointly efficient.
10
This implies that regardless of who wins the election the policy
implemented is ¯x ≡ arg max
x
P
i
u
i
(x), where we recall that politicians (once in office) care
only about maximizing lobbying contributions and that the payoff for any businessman is
linear in contributions. Intuitively, the fact that contribution schedules are compensating
means that the election winner fully internalizes the impact of changes in policy on each
businessman’s utility. In particular, this is the case regardless of whether the election winner
is a politician (in which case the election winner chooses the policy jointly efficient among
all businessmen) or a businessman (in which case the election winner internalizes the effect
of changes in policy on his own utility and on the utilities of every other businessman). An-
ticipating the outcome of the lobbying game, voters are indifferent among candidates when
campaign promises are not binding. Consequently, if there are N candidates each wins with
probability
1
N
.
The sharp prediction that equilibrium policy does not depend on the identity of the elec-
tion winner follows from the assumption that politicians care about lobbying contributions
but not policy. (Alternatively, policy would not depend on who wins if politicians cared
about policy but were also able to lobby the election winner, an implication of the Coase
10
Bernheim and Whinston refer to compensating equilibria as “truthful” equilibria. We follow Grossman
and Helpman (1994) in using the term “compensating,” which emphasizes that differences across policies in
promised contributions must compensate the businessman for changes in his policy payoff.
13
Theorem.) In practice, politicians may have direct preferences over policy, so that the policy
that is jointly efficient among all businessmen might be different from that which is jointly
efficient among all businessmen and a politician. Our results would then hold approximately
so long as the aggregate policy interest of all businessmen is large relative to the interest of
the sole politician who acquires public office, an assumption consistent with the observations
of Olson (1965) and Stigler (1971), among others.
Even though the equilibrium policy is the same regardless of who wins, the distribution
of rents is not. A politician who wins receives lobbying contributions from all businessmen,
whereas a businessman who wins saves on his own lobbying contribution and receives con-
tributions from all other businessmen. The following proposition establishes that there is
thus a common endogenous rent from holding office, regardless of the identity of the election
winner.
Proposition 3. When campaign promises are not binding, there is an endogenous rent R
from holding office common to all election winners—politicians and businessmen. This rent
is given by the following expression:
R =
X
j
X
i6=j
[u
i
(x
−j
) − u
i
(¯x)] , (1)
where x
−j
≡ arg max
x
P
i6=j
u
i
(x) and ¯x ≡ arg max
x
P
i
u
i
(x).
Proof. See appendix.
How does the endogenous rent R to be earned by the election winner depend on the
political-economic environment? Formally, Expression 1 is the sum of contributions paid by
each businessman when the election winner is a politician, and is the sum of contributions
paid by all other businessmen when a businessman is the election winner plus the contribution
that the election winner would otherwise pay if he were not on the receiving end of the
lobbying process. Intuitively, R is bigger when the conflict of interest among businessmen is
14
greater, because then the election winner is able to more effectively play one businessman’s
interests off of another’s.
When campaign promises are binding the circumstances under which businessmen might
choose to run for office are sharply circumscribed. In contrast, when campaign promises
are not binding the election winner has monopoly power that may be used to extract rents.
Because the only way to extract these rents is to actually hold office, a businessman may
be tempted to run. The following proposition gives the precise condition for existence of an
equilibrium with a businessman candidate.
Proposition 4. When campaign promises are not binding, there exists an equilibrium with
at least one businessman candidate if and only if there is some integer N such that
v+R
δ
−1 ≤
N ≤
v+R
κ
.
Proof. Recall that policy is the same regardless of the election winner, so that voters are
indifferent among candidates and so all candidates win the exogenous rent v and endogenous
rent R with equal probability. Then no politician (and no businessman because κ > δ) who
has not entered the race wants to deviate by entering, given that N candidates have entered,
if
v+R
N+1
− δ ≤ 0. In addition, no businessman who has entered the race wants to deviate by
not entering if
v+R
N
− κ ≥ 0. These together imply the condition in the proposition. Q.E.D.
For δ and κ sufficiently close to each other (and thus sufficiently close to
v
2
because by
assumption δ <
v
2
< κ) there is always an N that satisfies the condition in Proposition 4. If,
however, the payoff from holding office (v + R) is sufficiently large relative to the difference
in entry costs of politicians and businessmen, then there is no equilibrium with businessman
candidates. Intuitively, when the (exogenous and endogenous) rent from holding office is
large, politicians crowd out businessmen: though both may benefit from holding office, the
cost of entry for politicians is lower. For a businessman to want to stay in the race the
number of candidates must be sufficiently low to guarantee a large enough chance of winning
to offset the cost of entry. But when the rents from office are large this requirement is
15
inconsistent with the equilibrium condition that no other politician wants to enter the race.
Proposition 5. When campaign promises are not binding, there exists no equilibrium with
a businessman candidate if the payoff from holding office (v + R) is sufficiently large.
Proof. The condition in Proposition 4 does not hold for any N when
v+R
δ
− 1 >
v+R
κ
, i.e.,
when v + R >
δκ
κ−δ
. This is clearly the case for v + R sufficiently large. Q.E.D.
An implication of Proposition 5 is that the distribution of rents among politicians and
firms tends to favor politicians when the returns from policy influence are large. With
businessmen crowded out of electoral politics, politicians are in a position to extract rents
through control of public policy. When political institutions are weak and policy makers earn
large rents, talented individuals might therefore be drawn to politics rather than business.
(In contrast, when political institutions are strong, rents are competed away through the
process of electoral competition.) This could have a negative impact on growth, as potential
innovators are drawn away from the private sector (Murphy, Shleifer and Vishny, 1991). It is
important to stress, however, that businessman candidates are also engaged in rent seeking
rather than productive business activity.
1.2 Campaign finance
Thus far we have assumed that voters have fixed policy preferences. In this environment,
the ability of businessmen to affect the election outcome is limited to entering the race and,
when campaign promises are binding, adopting a platform. In practice, voters’ preferences,
and thus the election outcome, may be influenced by campaign spending. To the extent that
businessmen have disproportionate access to funds for campaign finance, one might think
that businessmen would be more likely to run for public office even when campaign promises
are binding. In fact, this is not the case.
We model the role of campaign finance in the following reduced-form way. At the begin-
ning of the game one voter is chosen at random to be the opinion maker. Following entry
16
but prior to platform choice, the opinion maker announces a policy x ∈ X, which voters then
adopt as their most-preferred policy. The opinion maker most prefers policy ˆx 6=
¯
x. The
opinion maker, however, is susceptible to influence by businessmen, who lobby the opinion
maker in a menu auction analogous to the one that follows the election when campaign
promises are not binding. In particular, each businessman i offers a contribution schedule
D
i
(x), which promises a particular contribution for every possible announcement x of the
opinion maker. We assume that the opinion maker maximizes the sum of her payoff from
policy x and from lobbying contributions paid to her. As with the lobbying game that fol-
lows the election when campaign promises are not binding, we restrict attention to equilibria
in which contribution schedules are compensating. Further, to assure a unique outcome to
the lobbying game defined here, we assume that for every set of businessmen from which no
more than one businessman is missing, there is a unique policy that maximizes the sum of
payoffs for the opinion maker and the businessmen from policy x.
Consider first the case where campaign promises are binding. Businessmen have an in-
centive to lobby the opinion maker to influence the campaign promises that candidates make.
So long as there are at least two candidates, the policy announced by the opinion maker will
be adopted by each candidate, and that policy will be implemented by the election winner.
The opinion maker thus acts as policy maker, and lobbying contributions from businessmen
follow accordingly. Given the restriction to compensating contribution schedules, the policy
announced by the opinion maker is jointly efficient among the opinion maker and the busi-
nessmen. Denote this policy as ˜x, and the equilibrium contribution made by businessman
i to the opinion maker as
˜
D
i
(˜x). The payoff to any businessman i from entering the race,
given that there are N − 1 other candidates, is then u
i
(˜x) +
v
N
− κ −
˜
D
i
(˜x). In contrast,
the payoff from deviating by staying out of the race, so long as there are at least two other
candidates, is u
i
(˜x) −
˜
D
i
(˜x). Given the assumption that κ >
v
2
, the first expression is
always less than the second. Therefore, as in the model with no campaign finance, there
is no equilibrium with three or more candidates, at least one of which is a businessman
17
candidate. (Similarly, we may show as in Proposition 2 that there may be a two-candidate
equilibrium with a businessman candidate, but that this equilibrium is Pareto-dominated by
a two-candidate equilibrium with no businessman candidates.) Intuitively, when campaign
promises are binding, a businessman need not be in the race to affect the policy that is im-
plemented after the election. Interestingly, if the opinion maker does not care about policy
but only about lobbying contributions paid to her, then the equilibrium policy outcome is
the same as in the case where campaign promises are not binding and there is no campaign
finance.
Now consider the case where campaign promises are not binding. Businessmen have no
incentive to lobby the opinion maker. As in the model without campaign finance, voters
anticipate that whoever is elected will be unconstrained by campaign promises and so will
implement ¯x. Given that, campaign promises are meaningless, so voters are indifferent
among all candidates regardless of the position adopted by the opinion maker after being
lobbied by businessmen. The condition for existence of an equilibrium with a businessman
candidate is then exactly that given by Proposition 4 above.
In summary, campaign finance may influence the equilibrium policy outcome when cam-
paign promises are binding, but in either institutional environment the possibility of busi-
nessman candidates is unaffected. As in the model without campaign finance, businessman
candidates are likely only when campaign promises are not binding, with the distribution of
rents but not policy determined by the election winner.
11
11
An alternative approach to modeling campaign finance would be to assume that some voters have pref-
erences over candidates that are unrelated to candidate platforms and that may be influenced by campaign
spending. Baron (1994) considers such a model for the special case of two candidates and binding campaign
promises (see also Grossman and Helpman, 1996). His setup suggests qualitative results analogous to those
in our model. When campaign promises are binding, candidate platforms are skewed toward the preferences
of contributing groups. As businessmen may influence policy in this way regardless of their actual participa-
tion in the race, businessman candidates should therefore be unlikely when campaign promises are binding.
In contrast, when campaign promises are not binding, campaign-finance effects of this sort may actually
bring more businessman into the race, as a businessman’s financial wealth can give him an advantage in
competing for the endogenous rent from holding office.
18
2 Empirical Analysis
Our theoretical model generates two distinct testable hypotheses. First, Propositions 1 and
2 suggest that businessman candidates should be less likely in the presence of institutions
that make reneging on campaign promises costly; in such an environment, rents from public
office are competed away, with any candidate—businessman or politician—forced to adopt
the same electoral platform. Second, Proposition 5 states that when institutions that make
reneging on campaign promises costly are weak, businessman candidates should be less likely
when returns to businessmen from policy influence are large, as rent-seeking politicians crowd
out businessmen with relatively high opportunity costs of political participation.
Does the empirical evidence support these predictions? We address this question by
examining the incidence of businessman candidates in Russian gubernatorial elections be-
tween 1991 and 2005.
12
Russia provides an ideal empirical setting for two reasons. First,
Russia’s democratic institutions are immature, and so generally provide limited incentives
for elected politicians not to break campaign promises. In many regions the media are too
biased, and government decision making insufficiently transparent, for citizens to monitor
the actions of elected officials (e.g., Akhmedov and Zhuravskaya, 2004; Fish, 2005). Political
parties are also weak, increasing the scope for opportunistic behavior by individual politi-
cians (e.g., White, Rose and McAllister, 1997; Rose and Munro, 2002; Colton and McFaul,
2003; Smyth, 2006; Tucker, 2006; Hanson, Forthcoming). This is especially true of regional
elections, where few candidates are nominated by political parties, and those parties that are
active are often local organizations with little ideological orientation.
13
As a consequence of
this institutional weakness, “rather than invest in a candidate’s election,” businessmen often
“buy the cooperation of [politicians] on particular votes or issues” (Treisman, 1998, p. 14).
Consistent with our argument, one might therefore expect the phenomenon of businessmen
12
Regional executives in Russia are known variously as “governor,” “president,” and (in Moscow, which
has regional status) “mayor.” For simplicity, we use the term “governor” to refer to any regional executive.
13
Golosov (2004) reports that party nominees account for a mere 15 and 7 percent, respectively, of win-
ning gubernatorial candidates in two election cycles between 1995 and 1999. McFaul (2001) discusses the
ideological weakness of regional political parties.
19
candidacy to be pervasive, as businessmen seek to extract rents and avoid lobbying costs by
holding public office themselves.
14
Second, at the regional level there is substantial variation in the quality of these institu-
tions, in part the result of political and economic decentralization in the early 1990s (e.g.,
Shleifer and Treisman, 2000), as well as in economic structure and thus the potential returns
from policy influence. We exploit this variation to test the model’s predictions by comparing
the likelihood of businessman candidacy across different regional political-economic environ-
ments. At the same time, we hold constant any effect of variables not stressed by our theory
but potentially important in explaining businessman candidacy, such as legal restrictions on
business activities by public officials (which may themselves be endogenous to businessman
candidacy, and which in practice are unenforced in Russia) and electoral rules. In Russia,
the legal environment for gubernatorial elections is set at the national level, and so is the
same for all regions.
15
2.1 Data and measures
Russian gubernatorial elections were held from June 1991 through February 2005. Since then
regional executives have been chosen by a system of presidential nomination. In all, there
were 247 elections in 88 regions (out of 89 total) during the period of direct gubernatorial
14
Indeed, while our focus is on gubernatorial elections, there is evidence that businessmen are also running
in large numbers in other elections in Russia. For example, the Russian newspaper Kommersant reports
that 77 members (out of 450) of the Duma (the lower house of parliament) elected in 1999, and 66 members
elected in 2003, were “direct representatives” of business (“Biznes i Vlast: Zakonodatelnyi Sovet Direktorov
[Business and Power: The Legislature as Boardroom],” Kommersant, December 26, 2003). Published and
unpublished data on business representation in the 2003 Duma gathered by the Moscow Times suggest that
the latter number may be a substantial underestimate (“Duma Has a Big Business Lobby,” Moscow Times,
January 20, 2004; Francesca Mereu, Moscow Times, private communication).
15
Our focus on gubernatorial elections may also be advantageous because for much of the time period of our
study, Russia’s governors—in contrast to members of Duma—enjoyed no judicial immunity. Consequently,
any concern that businessmen might run for office to escape criminal prosecution would not apply to those
elections. Russia’s governors did enjoy judical immunity from roughly 1995 to 2001 by virtue of their position
as members of the Federation Council, Russia’s upper house of parliament. Nonetheless, controlling for other
characteristics, the average probability of a businessman candidate in a gubernatorial election was actually
greater after the elimination of this privilege than before.
20
election.
16
Each of the 88 regions had at least two and at most five gubernatorial elections,
with an average of 2.8 elections per region.
We gathered information on the business affiliation of candidates in each of these elections,
drawing on two sources: 1) official candidate biographies published by the Russian Central
Election Commission, and 2) the Labyrinth database, available at www.labyrinth.ru, which
provides biographies of Russian businessmen and politicians. We classified a candidate in
a gubernatorial race as a businessman candidate if 1) at the time of the electoral race the
candidate was a major owner and/or top manager of a business, and 2) this business was
not acquired by the candidate while holding public office. The latter situation describes not
a businessman candidate but a professional politician who used public office for private gain.
As Table 1 shows, according to this definition there was at least one businessman candidate
in 151 of the 247 elections. Of these, in 104 elections a businessman candidate received
at least five percent of the vote, and in 66 elections a businessman candidate received at
least ten percent of the vote. In all there were seventeen winners who were businessman
candidates.
We define the following three dummy variables: 1) Businessman candidate, which takes
a value of one if there was any businessman candidate in the race, and zero otherwise; 2)
Businessman candidate with more than five percent of the vote, which takes a value of one
if there was any businessman candidate in the race who received at least five percent of the
vote, and zero otherwise; and 3) Businessman candidate with more than ten percent of the
vote, which takes a value of one if there was any businessman candidate in the race who
received at least ten percent of the vote, and zero otherwise. (Recall that the model’s key
predictions relate not to the number of businessman candidates, but to whether any busi-
nessman would choose to run in a particular institutional environment.) The first variable
indicates the presence of any businessman candidate in the race, whereas the second and the
third indicate the presence of a “serious” businessman candidate, i.e., of a candidate with
16
One region—the republic of Dagestan—never had direct gubernatorial elections; executives were instead
appointed by the regional parliament.
21
a realistic expectation of winning. This distinction is important, as businessmen may have
non-electoral incentives to run for office. In Russia in particular businessmen sometimes
(mis-)use the free media access guaranteed by law to each electoral candidate in order to ad-
vertise their products (Kryshtanovskaya, 2005). We primarily look at “serious” businessman
candidates because we are interested only in businessman candidates who run for electoral
reasons.
To test the relationship between institutional environment and the likelihood of (serious)
businessman candidates, we consider three characteristics of Russian regions that may reflect
constraints on the ability of public officials to renege on campaign promises: media freedom,
government transparency, and strength of national political parties. Media freedom and
government transparency allow voters to better monitor public officials and so to punish
office holders who have reneged on campaign promises. Strong political parties can more
easily enforce party discipline and therefore prevent opportunistic behavior by their members.
We therefore anticipate that businessman candidates should be less likely in regions with
high media freedom, high government transparency, and strong parties. Data sources and
summary statistics for these and other independent variables are given in Table 1.
Of these three institutional variables, two are expert ratings available only as cross-
sectional data. The index of media freedom is collected and published by the nongovern-
mental organization “Public Expertise,” and is based on regional media law, independent
representation on regional media licensing commissions, and the actual regional circulation
and coverage of private media. The index of government transparency is provided by “Media
Soyuz,” an independent association of journalists, and measures the extent to which policy
decisions made by the executive branch of the regional government (i.e., the governor’s office)
are accessible to the general public through the media and publication on official websites.
Both indexes were published in 2000 and reflect conditions in Russian regions during the
1990s. We discuss potential endogeneity concerns related to these variables later in the pa-
per. Missing data for these measures and for regional income per capita (discussed below)
22
reduce the number of observations somewhat from the 247 elections in the data set.
17
We constructed the third variable, a proxy for the strength of national political parties,
for each region and each year using information on the party affiliation of candidates for the
Duma, the lower chamber of the Russian parliament. From 1991 to 2005 there were four
parliamentary elections in Russia (in 1993, 1995, 1999, and 2003). In each of these elections,
one half of the members of the Duma were chosen by majoritarian voting with typically
multiple single-member districts (SMDs) in each region; the other half of the seats were filled
according to proportional representation with party-list voting in a single national district.
According to the electoral rules for these elections, SMD candidates could be nominated
either by a political party or by an independent group of voters of a certain minimum size.
We define strength of parties as the proportion of SMD candidates across all districts
in a region who were nominated by national political parties in the previous election rather
than by independent groups of voters. As there were four parliamentary elections in Russia
between 1991 and 2005, this measure varies over time as well as across regions. Over these
four elections, 23 percent of all SMD candidates were nominated by national political parties,
where we designate a party as national if its national vote in that Duma election exceeded
the legal threshold to receive seats through proportional representation.
Testing for any crowding out of businessman candidates by professional politicians re-
quires a measure of the attractiveness of holding gubernatorial office. Our primary focus is
the endogenous rent R from holding office: the unofficial “compensation” from lobbying that
is received (or saved) by the election winner. We assume that the opportunity to extract
such rents is higher in regions with abundant natural resources, as the opportunity to play
one businessman off of another may be especially large in such regions (e.g., Sonin, 2003;
Acemoglu, Robinson and Verdier, 2004; Mehlum, Moene and Torvik, 2006). Under this as-
sumption, the prediction of the model is that businessman candidates should be less likely in
17
The media freedom index was not constructed for eight regions, and the government transparency index
for two regions. Russia’s statistical agency did not publish income data separately for autonomous okrugs for
some years included in our sample. Using the Amelia II program, which implements the procedure described
in King et al. (2001), we have verified that our results are robust to multiple imputation of missing values.
23
regions that are rich in natural resources, but only in the absence of institutions that make
reneging on campaign promises costly. We test this prediction by interacting the institu-
tional variables discussed above with log(percentage of regional employment in extraction
+ 1). We use the log transformation to more closely approximate a normal distribution. In
the discussion to follow we refer more simply to log extraction share or log percentage of
employment in extraction.
2.2 Empirical methodology
To examine the effect on businessman candidacy of institutions that make reneging on cam-
paign promises costly, we estimate a probit model on the pooled sample of all gubernatorial
elections, where the probability of a businessman candidate is
Pr(b
i
= 1) = α
t
i
+ βm
r
i
+ γp
r
i
t
i
+ δd
r
i
t
i
+ η
0
X
i
+ ε
i
. (2)
The subscript i indexes each gubernatorial election; the subscripts r
i
and t
i
index region and
year, respectively, of gubernatorial election i; b
i
denotes one of the three dummy variables
for presence of a businessman candidate in the race in election i; m
r
i
is either media freedom
or government transparency of region r
i
; p
r
i
t
i
is the strength of parties; d
r
i
t
i
is log extraction
share; and X
i
is a vector of control variables described below. Our hypothesis is that
businessman candidates are less likely in the presence of institutions that make reneging on
campaign promises costly, i.e., that β < 0 and γ < 0. We correct standard errors to allow
for clustering of error terms (ε
i
) within regions.
To test our hypothesis that businessmen are crowded out by professional politicians when
institutions that make reneging on campaign promises costly are weak and returns from
policy influence are high, we study the differential effect of the log percentage of employment
in extraction in regions with strong and weak political institutions by estimating two probit
24
regression models:
Pr(b
i
= 1) = α
t
i
+ βm
r
i
+ γp
r
i
t
i
+ δd
r
i
t
i
+ ζm
r
i
d
r
i
t
i
+ η
0
X
i
+ ε
i
; (3)
Pr(b
i
= 1) = α
t
i
+ γp
r
i
t
i
+ δd
r
i
t
i
+ ζp
r
i
t
i
d
r
i
t
i
+ η
0
X
i
+ ε
i
. (4)
Our prediction is that ζ > 0 in both of these equations. As with the previous model, we
correct standard errors to allow for clustering of error terms within regions.
In all empirical models we control for regional and election characteristics that may be cor-
related with both the likelihood of businessman candidacy and our measures of institutions
and rents from holding office. We include dummy variables for two regional designations:
republic status (21 regions) and autonomous-okrug status (11 regions). Republic status im-
plies the presence of a titular ethnic group and typically greater autonomy from the federal
center, whereas autonomous okrug status implies that the region is geographically and—
to some extent—administratively a part of another region. In both cases the institutional
environment may differ from that in other regions in a way that influences the likelihood
of businessman candidacy. In addition, we control for log population and log regional in-
come per capita, as both formal compensation and “ego” rents from holding office (v in the
model) may be larger in relatively populous and wealthy regions. We include a dummy vari-
able equal to one if the incumbent governor ran for reelection (“incumbent participation”),
as the advantages of incumbency in an electoral contest may influence the incentives for a
businessman to participate in the race. We also include the number of candidates in the
election as a covariate, as our dependent variable is the probability that at least one candi-
date is a businessman candidate (with a certain percentage of the vote), which we do not
want to conflate with the number of “draws” from the pool of potential candidates. Finally,
we include year fixed effects to prevent spurious correlation related to variation over time
in both the average number of businessman candidates and the average level of some of our
independent variables.
25
In the next section we report our main results. Following that we discuss robustness and
possible endogeneity problems.
2.3 Empirical results
Our first empirical result is that variation in the regional institutional environment has ex-
planatory power only for the presence of “serious” businessman candidates, i.e., only for
businessman candidates with a nontrivial chance of winning. There is virtually no relation-
ship between our measures of media freedom, government transparency, and party strength
on the one hand, and the probability that there is any businessman candidate in the race
on the other. (For conciseness, we do not report estimation results.) Henceforth we focus on
explaining variation in the presence of “serious” businessman candidates, defined as those
who received at least five or ten percent of all votes cast.
Figure 1 illustrates our baseline empirical findings, showing adjusted partial residual plots
for linear probability models analogous to the probit models in Equations 2 and 3. Consistent
with the first hypothesis, businessman candidates are less likely in regions with relatively free
media, controlling for other characteristics of regions and elections that may be correlated
with both businessman candidacy and media freedom. As it may be more costly to renege on
campaign promises when media can report on the actions of elected officials, this suggests
that businessman candidacy is negatively correlated with institutions that help to make
campaign promises binding. Consistent with the second hypothesis, the interaction of media
freedom and log extraction share is positive, again after controlling for other characteristics
of regions and elections. As the estimated coefficient on log extraction share is negative (not
illustrated here, but reported below for the probit models), this indicates that crowding-out
effects are stronger when the media are relatively unfree than when they are relatively free.
To more formally test these hypotheses, we turn to probit estimation. Table 2 presents
results from these models, reporting estimated marginal effects on the probability of a busi-
nessman candidate with at least five percent and ten percent of the vote. The first four
26
columns report results from the probit model that tests the direct effects of our main ex-
planatory variables (Equation 2 above). We find a significant negative association between
regional institutions that make it more difficult to renege on campaign promises and the
probability of having a serious businessman candidate in the gubernatorial race. The es-
timated effects of media freedom and government transparency both have the predicted
negative sign and in all specifications are statistically significant. The estimated effect of
strength of parties always has the predicted sign, but is statistically significant only when the
dependent variable is the probability of a businessman candidate with at least ten percent
of the vote and strength of parties is entered together with media freedom.
The magnitude of these estimated effects is as follows. An increase of one standard devi-
ation in the media freedom index leads to a fourteen- and fifteen-percentage point fall in the
probability of having a businessman candidate with five and ten percent of the vote, respec-
tively. Government transparency has a somewhat weaker effect: a one-standard-deviation
increase in the government transparency index leads roughly to an eight-percentage-point
fall in the probability of a businessman candidate with either five percent or ten percent of
the vote. Finally, an increase of ten percentage points in the share of SMD parliamentary
candidates nominated by national political parties (our measure of party strength) results in
a fall in the probability of a businessman candidate with ten percent of the vote of approxi-
mately four to five percentage points, though the estimated effect is statistically significant
only in one of the two specifications.
The first four columns of Table 2 also show that the average effect of log extraction share
(our measure of endogenous rents from holding political office) on the probability of busi-
nessman candidates is consistently negative, though insignificant in those models with a 5%
“seriousness threshold” for businessman candidates. The consistently negative average effect
of log extraction share is suggestive of the overall weakness of democratic institutions in Rus-
sia’s regions, as the model predicts crowding-out effects only in the absence of institutions
that make reneging on campaign promises costly. To examine the impact of regional variation
27
in these institutions, we estimate the differential effect of resource abundance on business-
man candidacy in regions with strong and weak democratic institutions by interacting log
extraction share with our institutional measures (Equations 3 and 4 above). We report esti-
mation results from these models in Columns 5–10 of Table 2. Consistent with the model’s
prediction, the estimated effect of the interaction between media freedom and government
transparency on the one hand, and log percentage of employment in extraction on the other,
is always positive, and is statistically significant in all but one specification (Columns 5–8).
Only in regions with relatively low media freedom and government transparency (where busi-
nessman candidates generally are more frequent) does resource abundance lead to a decrease
in the probability of serious businessman candidates. The estimated effect of the interac-
tion of log extraction share and party strength also has the predicted negative sign, but is
imprecisely estimated (Columns 9 and 10).
To illustrate the size of these crowding-out effects, we compare the effect of resource
extraction on the probability of businessman candidacy in regions with strong and weak
institutions. In regions with media freedom one half standard deviation below the mean,
a one-standard-deviation increase in log extraction share leads to an eight-percentage-point
decrease in the probability of a businessman candidate with ten percent of the vote. In
contrast, in regions with media freedom one half standard deviation above the mean, an
increase of one standard deviation in log extraction share leads to a one-percentage-point
decrease in the probability of a businessman candidate with ten percent of the vote. The
interaction of government transparency and resource abundance is similar, though somewhat
stronger. For regions with government transparency one half standard deviation below the
mean, a one-standard-deviation increase in log extraction share results in a decrease of
thirteen percentage points in the probability of a businessman candidate with ten percent
of the vote, whereas for regions with government transparency one half standard deviation
above the mean, the estimated effect of an increase in log extraction share is essentially zero.
Overall, the evidence is consistent with the two main predictions of the model. First,
28
regions with freer media and more transparent government—and hence stronger commit-
ment to campaign promises—witness significantly fewer businessman candidates, with some
evidence of similar effects for party strength. Second, businessman candidates are crowded
out by professional politicians when the endogenous rents from holding office (as measured
by the resource intensity of the local economy) are high, but only when institutions that
make reneging on campaign promises costly are weak.
2.4 Robustness
We performed a number of checks to assure that our results are robust. First, we confirmed
that our findings are not driven by any outlier regions or elections, searching for influential
observations and finding none. Second, we verified that exclusion of any covariate or group
of covariates did not yield results substantively different from those reported above. The
particular set of covariates affects neither the qualitative nor the quantitative results. Third,
we checked that the results are robust to model selection. In addition to the probit model
reported in the paper, we estimated linear probability and logit models and allowed for
regional random effects. The baseline results were unaffected.
A crucial assumption necessary for the validity of our empirical approach is the exogeneity
of our explanatory variables. There are potentially two problems with this assumption. First,
there could be reverse causality between our dependent variables and some of the regressors.
In particular, one might argue that media freedom and government transparency could be
affected by the identity of the office holder, which in turn may be correlated with businessman
candidacy. Yet as the discussion of the lobbying process makes clear, any office holder should
prefer less to more media freedom and government transparency. For both businessmen and
professional politicians, the opportunity to benefit from control of the policy process once
in office is greater in the absence of institutions that make reneging on campaign promises
costly. Nonetheless, we repeated our empirical exercise on the subsample of 119 elections
that took place in 2000 and later, which is the time period after our measures of media
29
freedom and government transparency were constructed. The results are robust: the signs
and magnitude of estimated effects are very close to those in the full sample. Some effects
of interest do lose significance, but this may be attributed to a decrease in the number of
observations by approximately one half from the baseline regressions. Similarly, one could
argue that both the number of candidates and incumbent participation could be affected by
participation of businessmen in the election. Intuitively, the participation decision of any
politician or businessman depends in equilibrium on who else enters. There are no good
instruments for these regressors, but we did verify that our basic results are robust to the
exclusion of these variables from the list of covariates.
Second, endogeneity could arise from unobserved regional variation. This is a particular
concern because our empirical results are derived from cross-sectional analysis and Russia’s
regions are very diverse. We are unable to control for this variation with fixed effects, as
two of our three institutional measures (media freedom and government transparency) are
available only as a cross section, and our measure of resource abundance—while available
as a panel—varies little over time. To partially address this problem, we control for the
regional characteristics discussed above: republic and autonomous okrug status, population,
and income per capita. We also tried adding a number of other regional characteristics
as covariates, including population density, urban population share, average temperature,
latitude, longitude, and distance from Moscow. Our results were unaffected. Finally, and
perhaps more importantly, we included a control for the political preferences of the electorate.
One might argue that businessman candidates would be less likely to win—and thus less
likely to run—in regions with communist electorates. At the same time, such regions might
have weaker democratic institutions. To assure that we our results are not driven by any
such spurious correlation, we included the percentage vote received by Genadii Zyuganov—
the leader of Russia’s Communist Party—in the 1996 presidential election as an additional
control. In fact, the probability of a serious businessman candidate is uncorrelated with this
variable after controlling for other regional and election characteristics, and our basic results
30
were unaffected by its inclusion. Overall, our results prove robust.
3 Conclusion
What explains variation in the political participation of businessmen? What are the con-
sequences of businessman candidacy for public policy and the distribution of rents among
politicians and firms? We have argued that for businessmen to run for office despite high
opportunity costs of doing so, two conditions must hold. First, institutions that make reneg-
ing on campaign promises costly must be weak. When this is the case, office holders have
monopoly power that may be used to extract rents, and businessmen run to capture those
rents. Second, however, returns to policy influence must not be too large, as otherwise the
endogenous rents from holding office draw professional politicians into the race, crowding out
businessman candidates. We find empirical support for these theoretical results in an analy-
sis of Russian gubernatorial elections. Businessman candidates are less likely in regions with
high media freedom and government transparency, institutions that make reneging on cam-
paign promises costly. Further, crowding-out effects are evident in regions with large returns
to policy influence, as proxied by regional resource abundance, but only when institutions
that keep office holders accountable are weak.
The primary emphasis of this paper is positive. Yet our analysis also has normative
implications. When political institutions are weak, businessmen elected to public office may
use their position to further their business interests. That, however, does not necessarily
imply that public policy would be any different if the participation of businessman candidates
were restricted, e.g., by requiring that office holders sever any ties to businesses they own
or manage, as is the case in many countries.
18
Enforcement of such “conflict-of-interest”
legislation would result in a transfer of rents from businessmen to professional politicians,
as businessmen would be required to lobby for policies they otherwise could have chosen
18
In contemporary Russia the Kremlin has attempted to restrict participation of businessmen in politics by
more direct means. These efforts have been only partially successful. See, e.g., “72 United Russia Hopefuls
Linked to Business,” Moscow Times, November 2, 2007.
31
themselves. However, absent any broader change in the institutional environment to hold
elected officials more accountable to voters, public policy would remain largely the same.
This perspective also suggests a note of caution in interpreting cross-national data demon-
strating a positive correlation between bad policy and the presence of politically connected
firms. As Mara Faccio notes, such “findings are descriptive in nature and do not imply any
causality” (Faccio, 2006, p. 369). Our analysis suggests that both bad policy and political
connections may merely be indicators of a weak institutional environment where elected
officials can costlessly renege on campaign promises.
Appendix: Proof of Proposition 3
First, consider the case of an election winner who is a politician. In equilibrium the contri-
bution by each businessman j must leave the politician indifferent between (a) implementing
¯x and receiving
P
i
C
P
i
(¯x), where C
P
i
(.) is the equilibrium contribution schedule provided
by businessman i when a politician is the election winner, and (b) walking away from busi-
nessman j’s offer and implementing x
P
−j
, where x
P
−j
≡ arg max
x
P
i6=j
C
P
i
(x). Using the
assumption that contribution schedules are compensating, we may rewrite this as
x
P
−j
≡ arg max
x
X
i6=j
max
u
i
(x) −
u
i
(¯x) − C
P
i
(¯x)
, 0
.
This is equal to x
−j
≡ arg max
x
P
i6=j
u
i
(x) if u
i
(x
−j
) ≥ u
i
(¯x) for each businessman i, which
is an assumption of the model. Thus, x
P
−j
= x
−j
.
We can then express the politician’s indifference between ¯x and x
−j
as
P
i
C
P
i
(¯x) =
P
i6=j
C
P
i
(x
−j
). Using this, we can derive the contribution from businessman j when the
election winner is a politician as C
P
j
(¯x) =
P
i6=j
C
P
i
(x
−j
) − C
P
i
(¯x)
. Using again the
assumption that contribution schedules are compensating, we can rewrite this as C
P
j
(¯x) =
P
i6=j
[u
i
(x
−j
) − u
i
(¯x)].
Now consider the case when the election winner is some businessman k. In this case, the
32
contribution by any other businessman j must leave businessman k indifferent between (a)
implementing ¯x and receiving u
k
(¯x) +
P
i6=k
C
k
i
(¯x), where C
k
i
(.) is the equilibrium contri-
bution schedule provided by businessman i when businessman k is the election winner, and
(b) walking away from businessman j’s offer and implementing x
k
−j
, where
x
k
−j
≡ arg max
x
u
k
(x) +
X
i6=j,k
C
k
i
(x)
= arg max
x
u
k
(x) +
X
i6=j,k
max
u
i
(x) −
u
i
(¯x) − C
P
i
(¯x)
, 0
.
Similarly to the argument above, x
k
−j
= x
−j
given the assumption that u
i
(x
−j
) ≥ u
i
(¯x) for
each businessman i. We can then express businessman k’s indifference between ¯x and x
−j
as u
k
(¯x) +
P
i6=k
C
k
i
(¯x) = u
k
(x
−j
) +
P
i6=j,k
C
k
i
(x
−j
), which gives the following equilibrium
contribution for businessman j given that the election winner is businessman k: C
k
j
(¯x) =
[u
k
(x
−j
) − u
k
(¯x)] +
P
i6=j,k
C
k
i
(x
−j
) − C
k
i
(¯x)
. Using the assumption that contribution
schedules are compensating, we can rewrite this as follows: C
k
j
(¯x) = [u
k
(x
−j
) − u
k
(¯x)] +
P
i6=j,k
[u
i
(x
−j
) − u
i
(¯x)] =
P
i6=j
[u
i
(x
−j
) − u
i
(¯x)].
Thus, the equilibrium contribution by any businessman not in office is the same regardless
of the identity of the election winner. Using
¯
C
j
(¯x) to refer to this contribution, we define
the endogenous rent R
P
from holding office for any politician as the sum of contributions
received from all businessmen: R
P
≡
P
j
¯
C
j
(¯x) =
P
j
P
i6=j
[u
i
(x
−j
) − u
i
(¯x)]. Similarly, we
define the endogenous rent R
k
from holding office for any businessman k as the difference
between the payoff received when in office (a function of both the policy implemented and
the lobbying contributions received) and that when not in office (a function of both the
policy implemented and lobbying contribution paid):
R
k
≡
"
u
k
(¯x) +
X
j6=k
¯
C
j
(¯x)
#
−
u
k
(¯x) −
¯
C
k
(¯x)
=
X
j
¯
C
j
(¯x) =
X
j
X
i6=j
[u
i
(x
−j
) − u
i
(¯x)] .
33
Consequently, there is a common endogenous rent R ≡ R
P
= R
k
. Q.E.D.
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39
−.5 0 .5 1
Residual of BC with 10% of vote
−20 −10 0 10 20 30
Residual of media freedom index
coef = −.00824549, (robust) se = .00290872, t = −2.83
Effect of institutional quality
−.5 0 .5 1
Residual of BC with 10% of vote
−40 −20 0 20 40 60
Residual of x−term of media freedom and extraction
coef = .00381153, (robust) se = .00189288, t = 2.01
Crowding−out effect
Figure 1: Adjusted partial residual plots illustrating key results.
40
Table 1: Variable Sources and Summary Statistics
Panel A: Businessman Candidates (collected by the authors for each regional election)
Variable Frequency
Businessman candidate Dummy variable = 1 for 151 out of 247 elections (142 out of 231 elections*)
Businessman candidate with at least 5% of vote Dummy variable = 1 for 104 out of 247 elections (102 out of 231 elections*)
Businessman candidate with at least 10% of vote Dummy variable = 1 for 66 out of 247 elections (65 out of 231 elections*)
∗
Subsample for which regional data are available
Panel B: Sources and Definitions for Independent Variables
Variable Source and/or definition
Media freedom index Expert rating, published by Public Expertise, www.freepress.ru/arh e.shtml
Government transparency index Expert rating, published by Media Soyuz, www.strana.ru/print/128316.html
Strength of parties Proportion of single member district candidates from region in parliamentary
elections nominated by major parties, constructed by the authors using
data from the Russian Central Elections Commission
Percentage of employment in extraction industries Yearbook Russia’s Regions, Rosstat
Republic status Dummy variable = 1 if region has republic status
Autonomous okrug (AO) status Dummy variable = 1 if region has autonomous okrug status
Population Yearbook Russia’s Regions, Rosstat
Income per capita Yearbook Russia’s Regions, Rosstat
Incumbent participation Russian Central Elections Commission
Number of candidates Russian Central Elections Commission
Panel C: Summary Statistics
Variable Observations Mean Standard Deviation Minimum Maximum
Media freedom index 219 37.274 13.864 0 75
Government transparency index 229 3.667 1.984 0.03 8.75
Strength of parties 231 0.236 0.128 0 1
Log(percentage of employment in extraction industries + 1) 231 2.173 1.185 0 4.277
Dummy for republic status 231 0.229 0.421 0 1
Dummy for AO status 231 0.078 0.269 0 1
Log population 231 7.045 1.106 2.890 9.248
Log income per capita 231 −1.263 0.540 −2.580 0.141
Dummy for incumbent participation 231 0.892 0.311 0 1
Number of candidates 231 5.935 2.943 1 16
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Table 2: Determinants of Businessman Candidacy
Dependent variable: Probability of businessman candidate with at least 5% or 10% of vote.
1 2 3 4 5 6 7 8 9 10
BC with BC with BC with BC with BC with BC with BC with BC with BC with BC with
5% 10% 5% 10% 5% 10% 5% 10% 5% 10%
Media freedom −0.010 −0.011 −0.018 −0.019
[0.004]∗∗∗ [0.003]∗∗∗ [0.007]∗∗∗ [0.006]∗∗∗
Government transparency −0.040 −0.042 −0.123 −0.142
[0.022]∗ [0.019]∗∗ [0.047]∗∗∗ [0.036]∗∗∗
Strength of parties −0.206 −0.538 −0.130 −0.429 −0.216 −0.580 −0.151 −0.500 −0.629 −0.892
[0.340] [0.272]∗∗ [0.331] [0.272] [0.341] [0.278]∗∗ [0.338] [0.274]∗ [0.673] [0.549]
Log extraction share −0.007 −0.052 −0.017 −0.054 −0.141 −0.193 −0.177 −0.246 −0.075 −0.107
[0.032] [0.026]∗∗ [0.032] [0.028]∗ [0.082]∗ [0.071]∗∗∗ [0.081]∗∗ [0.064]∗∗∗ [0.072] [0.055]∗
X-term: Media freedom × 0.004 0.004
Log extraction share [0.002] [0.002]∗∗
X-term: Government transparency × 0.043 0.052
Log extraction share [0.022]∗∗ [0.015]∗∗∗
X-term: Strength of parties × 0.229 0.226
Log extraction share [0.280] [0.212]
Republic −0.145 −0.098 −0.050 0.013 −0.139 −0.088 −0.013 0.064 −0.045 0.023
[0.110] [0.084] [0.106] [0.109] [0.111] [0.084] [0.112] [0.115] [0.113] [0.113]
Autonomous okrug 0.003 0.365 −0.013 0.430 0.087 0.485 −0.009 0.466 −0.142 0.277
[0.242] [0.275] [0.253] [0.247]∗ [0.232] [0.224]∗∗ [0.234] [0.224]∗∗ [0.207] [0.247]
Log population −0.028 0.046 −0.043 0.017 −0.026 0.046 −0.027 0.044 −0.079 −0.019
[0.049] [0.048] [0.051] [0.049] [0.048] [0.048] [0.051] [0.048] [0.052] [0.049]
Log income per capita −0.201 −0.153 −0.110 −0.066 −0.190 −0.135 −0.111 −0.074 −0.118 −0.079
[0.082]∗∗ [0.076]∗∗ [0.080] [0.074] [0.082]∗∗ [0.076]∗ [0.078] [0.073] [0.079] [0.073]
Incumbent participation −0.069 −0.028 −0.038 −0.006 −0.088 −0.044 −0.005 0.038 −0.019 0.022
[0.130] [0.107] [0.123] [0.105] [0.135] [0.117] [0.127] [0.100] [0.120] [0.097]
Number of candidates 0.041 0.051 0.036 0.046 0.043 0.052 0.039 0.050 0.037 0.046
[0.014]∗∗∗ [0.012]∗∗∗ [0.014]∗∗∗ [0.011]∗∗∗ [0.014]∗∗∗ [0.012]∗∗∗ [0.014]∗∗∗ [0.012]∗∗∗ [0.014]∗∗∗ [0.012]∗∗∗
Year dummies yes yes yes yes yes yes yes yes yes yes
Observations 219 219 229 229 219 219 229 229 231 231
Pseudo R-squared 0.15 0.21 0.12 0.17 0.16 0.22 0.14 0.21 0.11 0.15
Number of clusters(regions) 81 81 86 86 81 81 86 86 87 87
Notes: Probit model. Marginal effects reported. Standard errors corrected for clustering at regional level in brackets. Significance levels: *** = .01,
** = .05, * = .10. “Log extraction share” is log(percentage of employment in extraction industries + 1).
42
