Consider the case of Acme Corp.

, a property development firm in a

small town called Nepotsville. The unwritten rule of doing business in
Nepotsville is that companies are expected to hire the city council's
friends and family members. Companies that make these strategic
hires end up getting their permits approved and winning contracts
from the city. Meanwhile, companies that "refuse to play ball" find
themselves getting sued, smeared in the local papers, and shut out of
new business.

In this environment, Acme faces two kinds of incentives, one

pragmatic and one political. First, like any business, it needs to
complete projects on time and under budget. And in order to do that,
it needs to act like a meritocracy, i.e., by hiring qualified workers,
monitoring their performance, and firing those who don't pull their
weight. But at the same time, Acme also needs to appease the city
council. And thus it needs to engage in a little cronyism, i.e., by hiring
workers who happen to be well-connected to the city council (even if
they're unqualified) and preventing those crony workers from being
fired (even when they do shoddy work).