From Economic to Political Power

Abstract

Triggered by a 2024 conflict between Elon Musk and the Supreme Court of Brazil, we study when private firms can challenge state authority. Our baseline models show how firms extract political concessions by threatening to withdraw infrastructure co-investments from dependent governments. Our dynamic model reveals that tolerating harmful activities erodes democratic institutions, paradoxically increasing government tolerance and creating a self-reinforcing downward spiral. Countries with intermediate democratic quality erode fastest. We identify two policy reversals: (i) public media investment can stabilize democracy at higher levels; (ii) civil society mobilization can force harmful platforms to shut down. However, civil society strength can collapse if repressions from harmful platforms accelerate faster than capacity-building. Both policy interventions are most effective when deployed early, before critical thresholds are reached. Case evidence from Brazil, Australia, and the EU supports our predictions.