This paper analyzes the nebulous concept of ‘crony capitalism’ and its association with anticompetitive regulatory practices. It argues that presence of such practices may be necessary for identification of crony capitalism but is not sufficient. In particular, we present a mathematical model where a rational, revenue-maximizing government finds itoptimal to allocate a monopoly license on the first-come, first-served basis, rather than by conducting an auction, when monopoly profits are not expected to be high in short term. Thus, mere allocation of property rights without competitive bidding cannot be classified as crony capitalism.

1. See Kang (2003) and webpagehttps://en.wikipedia.org/wiki/Crony_capitalism.

2. Of course, Raja tweaked the FCFS rule to reward the first entity to applyas well as comply with specific bureaucratic formalities that he decided on his own (seehttps://www.ndtv.com/india-news/how-raja-misused-pms-letter-while-allocating-2g-licences-468877).

3. See Singh and Zammit (2006), Wei (2001), Haber (2013) etc.

4. A second-price auction is an auction where: (1) the highest bidder wins, (2) each agent presents a sealed bid (that is unknown to other bidders), and (3) the winner pays the second highest bid as price to the auctioneer (in this case, government). Similar auction schemes have been used to allocate licenses to buy cars in Singapore, in an attempt to control traffic congestions (see Koh2004).

5. Note that this result is quite general in the sense that it does not depend on the exact values of reserve prices employed in each of the allocation schemes.

Authors and Affiliations

1. Economics Group, Indian Institute of Management Calcutta, Kolkata, India

   Conan Mukherjee

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Correspondence toConan Mukherjee.

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