Working Paper: CEPR ID: DP13216
Authors: Ufuk Akcigit; Salom Baslandze; Francesca Lotti
Abstract: Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.
Keywords: political connections; creative destruction; firm dynamics; innovation; productivity
JEL Codes: O3; O4; D7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political connections (D72) | innovation intensity (O31) |
| Political connections (market leaders) (L14) | patenting activity (O34) |
| Political connections (D72) | firm dynamics (D21) |
| Political connections (winning politicians) (D72) | employment growth (O49) |
| Political connections (winning politicians) (D72) | revenue growth (O49) |
| Political connections (D72) | survival probability (C41) |
| Political connections (high-rank politicians) (D73) | hazard rate of exiting the market (C41) |
| Political connections (D72) | productivity growth (O49) |