Friday, January 25, 2013

The Economics of Boycotts Revisited: The Case of Mayor Rahm and Guns

Chicago's Mayor is leading a divestment movement.  He is using his clout to nudge banks not to lend to gun makers and he is nudging institutional investors such as public pension funds to not invest in gun company stocks (for details see this).  The traditional view of boycotts is that they can't work because if you don't buy the bad guy's food somebody else will.  There is a free rider problem because there is always someone looking for a bargain.

But imagine a slight twist on this logic. Suppose that as public pension funds sell their shares of gun makers that foreign investors step up and buy.  Domestic government regulators will feel less political heat from interest groups if they now step up and regulate the gun makers and lower their profits because the shareholders are in the Middle East and elsewhere.   Does domestic ownership % of assets play a role in determining how much regulation an industry faces?  This is a testable hypothesis!  

Now, if the banks stop lending to the gun companies then this raises their cost of capital and weakens the companies.  They will have less $ to lobby in favor of NRA causes and they will have an incentive to "play nice".  A question arises concerning why don't foreign banks step up and lend to the gun makers?  This is the old "free rider" and boycotts issue again.    If the banking industry is competitive with an international fringe of potential entrants, then Rahm is wasting his time.  If there are just a few banks who lend to the Fortune 500 companies, then Rahm's efforts on the banking side may work.

Rahm also occupies a unique space that he is Mayor of Chicago and Friend of Obama.  Perhaps, he can credibly threaten to impose real costs on businesses if he can engineer a boycott.  Who is small in the market economy?  Is Rahm a price taker or price maker?