State capture, as defined by Grzymala-Busse (2008), is the extraction and appropriation of state resources by political actors to benefit themselves personally or politically. This is in opposition to extraction by the state (e.g. taxation) as part of the contract between state and polity, which is a necessary modus of state capacity development. This paper takes a formal theory approach to the question: how do elites distort state capacity to achieve state capture? It combines theories of inefficient institutions and elite capture and situates the different mechanisms of state capture within the literature on state capacity and corruption.
The paper adapts the seminal Besley-Persson model of state capacity (2011) to define four different modes of state capture in the form of distinct equilibria: exploitative, clientelist, party-state extraction and predatory (Grzymala-Busse 2008). We do so by allowing for programmatic differences by party, including an economic inequality parameter, and by endogenizing governance in the model as the cost of state capture. This allows us to formulate a measure of welfare loss from state capture (akin to cost of corruption measures), which indicates a potential for structural estimation of welfare distortions.