A question that bedevils the academic economist, the trustbuster, and the community at large is whether conglomerate merger activity is a force for good or evil. In common with horizontal and vertical merger activity, the critical consideration is whether conglomerate mergers produce better uses of resources, increases in monopoly power, or some mixture of these two results. Economists have been examining these mergers in an effort to determine whether efficiency in the use of resources is, in fact, promoted. However, when investigating this question, the subject of inquiry is usually confined to the optimizing decision of the firm. It has been argued that conglomerate activity involves the best use of resources from the standpoint of the firm.

The model presented assumes that public managers select investment projects hat maximize the net private benefits of their constituent pressure groups. This achieves increased agency size, which is more likely to increase managerial compensation than to maximize net social benefits, the assumed goal of the conventional public investment model. To increase agency size, managers must often resort to projects with low or negative return rates. The selection of such projects is possible because transactions costs are sufficiently large to bar successful opposition by disaffected taxpayers. The analysis as well as empirical evidence suggests that inefficient public projects are the rule rather than the exception.