Political influence and corporate profits: a study of Hungarian firms

This paper investigates the extent of political rent seeking in Hungary in the 2010s. Political capitalism--where powerful private interests influence public policy for private gain--creates opportunities for rent seeking that vary across sectors. The analysis is based on a theoretical model assuming rent seeking occurs in a three-stage process: changes in economic institutions granting regulatory privileges, which are enhanced by political-business networks; this leads to scarcities, and increased market power in certain markets; which then generates rents. To quantify this, the study evaluates Hungarian political capitalism by examining the impact of political decisions on firms' rents, analysing the profit trends of the 1,000 largest Hungarian firms (selected annually by net sales) and comparing their mean profit share (earnings before tax) across two periods: 2008-2012 and 2019-2023. A significant increase in a sector's mean profit share was assumed to indicate increased rent seeking. Using Welch's two-sample t-tests, three sectors were identified as potentially experiencing increased rent seeking: agriculture, construction, and financial and insurance activities. Quantitative findings include a 320% increase in mean agricultural profit share (70% in mean ROA), a more than fivefold increase in construction mean profit share (mean ROA from 3.3% to 10.1%), and a more than 6.5 times increase in financial sector mean profit share. Furthermore, a similar Czech analysis showed no significant increases in any sector's profit share, suggesting that the detected rises in Hungarian sectors are linked to domestic activities rather than external factors, which strengthens the findings.