July 1, 2013

A History of Cronyism and Capture in the Information Technology Sector

Key materials
Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

I. Introduction

“Cronyism,” which generally refers to an anticonsumer and corrupting affiliation between government and special interests, is a growing bipartisan concern today.[1] “Cronyism” is popular shorthand for government-granted privileges or favoritism,[2] which come in many flavors and have many economic and social costs.[3] This paper documents the evolution of government-granted privileges in the information and communications technology marketplace and in the media-producing sectors.

Various political privileges have been dispensed in the traditional communications and media markets, most often in the form of regulatory favoritism. Cronyism and government- granted privilege are also creeping into the modern high-tech and Internet-related sectors, most notably in the form of generous tax credits. This paper inventories some of the tax privileges that communications and media companies enjoy today.

The danger of creeping cronyism in the high-tech field is that it will dull entrepreneurialism and competition in this highly innovative sector. The opportunity costs of pursuing favors are significant. Time and resources spent influencing politicians and capturing regulators could instead be spent competing and innovating in the marketplace. Cronyism can thus negatively impact consumer welfare in two ways: not only does it deny consumers more and better products and services, but they also may pay higher prices or higher taxes extracted by the corporate-government agreement. Moreover, economic growth slows as entrepreneurs pursue unproductive influence and capture activities rather than productive entrepreneurship.

Cronyism also raises the specter of greater government control of the Internet and of the digital economy more generally. When policymakers dispense favors, they usually expect something in return. They may also become accustomed to having greater informal powers over the sector receiving favors. That result would be highly unfortunate for the information technology sector, since the Internet has largely developed and thrived in an unregulated environment.[4] Indeed, the Internet’s decentralized, bottom-up nature has been crucial to its success.[5] By contrast, Washington’s slow, administrative control of industries represents the antithesis of the digital economy. To avoid a predictable decline in innovation and consumer welfare, we offer strategies for stalling and diminishing the cronyism already taking root in the information and communications technology marketplace and in the media-producing sectors.

Continue reading