Political cronyism

This paper analyzes incentives for cronyism in politics within a political agency model with moral hazard. The analysis focuses on the institutional features, which define contractual and appointment procedures within political organizations. The institutional framework does not allow explicit contracting with politicians. They are motivated by reelection incentives and just need to guarantee that their team performance exceeds the minimum threshold required for reelection. This lowers the returns to bringing in efficient individuals in the politician’s team. Moreover, the nature of political promotions (such that a crony’s career is tied to that of his patron) leads to the alignment between political objectives of the politician and his cronies. This further increases the politician’s incentives to appoint less efficient friends. Copyright Springer-Verlag Berlin Heidelberg 2015