A note on
Market-based lobbying. Evidence from advertisement spending in Italy

settembre 20, 2017

di Stefano della Vigna, Ruben Durante, Brian Knight, Eliana La Ferrara
American Economic Journal, applied economy, 2016

During Berlusconi’s terms as prime minister, there was an increase of advertisements on Mediaset, his media company, and a change in the composition of spending with one class of companies (“regulated companies”) shifting their ads towards Berlusconi’s television channels. This behavior is presented by the authors as proof of their “key assumption”, i,e. the expectation of policy favors. By foregoing the search for other explanations, they miss a fairly plausible one. The authors exclude political considerations from their line of reasoning, but end up reaping a fruit of significant political importance, the measure of the increase of profits for Berlusconi’s networks.

I. Regulated industries.
An industry is considered “regulated” by the authors on the basis of the answers to a survey of Italian economists eliciting measures of regulation by industry. The ten answers (from twenty six who were asked to respond), backed by an online search, are used to construct a continuous measure of the degree of regulation by sector (p. 227).
Because the survey’s respondents enjoyed anonymity, and the question was closely defined, it is not surprising if the ten economists did not add any consideration on the structure of the regulated firms, whether private or controlled by the State (Treasury directly or via its financial arm, Cassa Depositi e Prestiti). The latter are many in number and big in size; they include ENI, Enel, Terna, SnamReteGas, Leonardo (formerly Finmeccanica), Poste, Ferrovie, and the large utilities controlled by local governments (A2A, Hera, Iren).

These companies didn’t need to buy advertisements in order to get regulatory favors, as governments (central but to some extent also local) were anxious to do whatever was reasonably possible in order to help the firms be more profitable so the large dividends they strived for could be distributed. The same can be said also for the other companies Berlusconi had some stake in, in particular the banking and insurance company, Mediolanum.
Every industry is affected by government policies and most are subject to specific constraints, but they are not regulated stricto sensu. Pharmaceutical firms are prohibited to advertise their products (with the exception of those sold in supermarkets). The automotive industry is not regulated but “Fiat is by definition pro-government”, as Giovanni Agnelli used to say. Incidentally, the policy of substantial incentives for purchases of new cars (p. 239) was granted by a center-left government.
RAI deserves special attention: it is strictly regulated, large, and 100% public. When the shift in advertising became evident, it was reluctant to react: might it be a case of negative market-based lobbying?

II. Legal framework: regulation authorities; conflicts of interest.
The Authority for Market and Competition (Antitrust) has control over the whole of Italian companies while Consob oversees the listed ones.
The Bank of Italy supervises the financial institutions and IVASS is responsible for the insurance industry.
There are quite a few Regulatory Authorities– for Electricity, Gas and Water; for Telecommunications (phone and TV); and more recently for Transport (both national and local rail) and highways. Each of them is backed by a corresponding European authority.
The members of the Authorities represent the major political parties, their heads are proposed by the Government and nominated by the Presidents of the House and of the Senate (Antitrust) or by the President of the Republic (for the Regulation Authority). They last for seven years, so as to be asynchronous with the governments (which theoretically last five years).

Italy’s political history is riddled with conflicts of interest. The one between political (and financial) interests of the governing parties and economic interests of the state-owned companies was monstrously large, lasted decades, and risked dragging Italy into its failure. ii The ensuing moral, political, and economic crisis helped create the conditions for Mr. Berlusconi’s political career, and thus for a different form of conflict of interest. It has always been at the center of the political debate, dangled even by Umberto Bossi, his ally in the coalition that won in 1994. There are reasons why Mr. Berlusconi’s opponents failed to find a solution, even when they were a majority in Parliament: the blind trust is useless when it holds a well identified company; the obligation to sell is, for Italian law, equal to a confiscation, for which indemnification is due.
Moreover it would have entailed a disastrous political cost for the left; with the seal of protector of private ownership against the statist “heirs of the Communist”, Mr. Berlusconi would have easily won the elections, and repealed the law. A law (215/2004)– giving the Antitrust the obligation to investigate and sanction deeds or omissions which can result in damages for the State– is too weak to be effective. Six years after Mr. Berlusconi’s resignation, a law is still pending in Parliament, unlikely to be approved before the elections.

III. The caveat
“Our analysis […] only focuses on one side of the exchange between firms and politicians – i.e firms’ spending decisions – and does not document the policy favors provided to firms in exchange.” (p. 229) Be it because the authors did not care to or because they were not able to document, this caveat is perplexing. And it’s surprising that the authors of the analysis of a novel lobbying channel are content to rely on the existing literature on lobbying.
One would expect  the authors to consider, at least as an hypothesis, that the reason fo not documenting the political favors might be because there were none, or because the casual relationship they have chosen is not able to capture any.

The state-controlled companies, by far the largest group of regulated industries, had no reason to spend more for getting what they could.
With such a formidable regulatory system, with a public opinion extremely (to the point of being exceedingly) watchful on questions related to Mr. Berlusconi’s conflicts of interest, what power did his governments have to make regulatory gifts? Appointing the CEO of the companies controlled by the state is one of the few decisions a government can take on its own: it happened for Enel in 1996, 2002, 2004, and 2014, for ENI in 1991, 2004, and 2014; four of these appointments were made during one of the periods (2001-2005, 2008-2011) when Berlusconi served as President of the Council of Ministers. The authors don’t even consider that these investments in advertising my be attributed to the desire to gain merits for reconfirmation. This is probably not the type of return the authors were looking for: it is left to them for further analysis.

IV. Advertising and the economic cycle.
The conflict between state-owned and private economy, between rent financed and advertisement financed television, between competition and state monopoly has been at the core of the “30 Years War” iii fought in defense of RAI’s public monopoly. Compared to the sometimes sanctimonious official RAI, Mediasetiv seemed a free TV. Private networks transmitted in color while RAI was confined to black and white until 1977; Berlusconi offered aggressive marketing tools to entrepreneurs used to waiting in line (and purchasing space in the parties’ newspapers) for their turn in the few minutes allotted to advertising. It was Mr. Berlusconi’s success in liberalizing the guarded sanctuary of information that made credible his promise in 1994 for a “mass liberty party”; even more so as his opponents showed a bent to statist solutions, and some of them openly promoted a renewed Communism. He failed to deliver on most of his promises, but his governments continued to be perceived as business friendly by the majority of the entrepreneurs.

After all, the main reason to advertise is to sell more, and the decision to do so is heavily contingent on economic cycles: a business friendly government entails favorable expectations of growth; companies may want to take advantage of this sentiment and invest in advertising, addressing the message to the customers likely to be more favorable to it, i.e. those more favorable to this government.

V. Conclusion
The behavior of economic agents depends on the structure of the firms (large or small, public or private), on the legal and regulatory framework, and on political history and political preferences. But the authors do not distinguish between public-controlled and private companies; nor do they pay attention to how the regulatory framework limits the possibility for a government to make presents. When they find no evidence of their key assumption, they don’t suppose this may have something to do with having eliminated all other possible causal relationships. The political considerations, not taken into account by the model, surface however at the end: the measure of the increased revenues (or of profits?) for Mr. Berlusconi is a result of great political significance and impact.

Market-based Lobbying: Evidence from advertisement spending in Italy
di Stefano della Vigna, Ruben Durante, Brian Knight, Eliana La Ferrara – American Economic Journal: Applied Economics 2016

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