Working Paper: CEPR ID: DP15141
Authors: Quocanh Do; Yenteik Lee; Bang Dang Nguyen; Kieutrang Nguyen
Abstract: Does higher office always lead to more favoritism? We argue that firms may lose their benefit from a connected politician’s ascent to higher office, if it entails stricter scrutiny that may reduce favoritism. Around close Congress elections, we find RDD-based evidence of this adverse effect that a politician’s win reduces his former classmates’ firms stock value by 3.2% after a week. Exploiting the entry of Craigslist across the U.S., we find that state-level scrutiny drives this effect. It further varies with politician’s power, firm size and governance, and connection strength, and diminishes as a politician’s career concern fades over time.
Keywords: favoritism; power scrutiny; political connection; congressmen; close election
JEL Codes: D72; D73; D85; G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Politician's win (D72) | Stock value of connected firms (G32) |
| Increased scrutiny (G18) | Favoritism towards connected firms (L14) |
| Politician's ascendance to higher office (D73) | Increased scrutiny (G18) |
| Increased scrutiny (G18) | Stock value of connected firms (G32) |
| Firm size (L25) | Effect on stock value of connected firms (G34) |
| Governance structure (G38) | Effect on stock value of connected firms (G34) |
| Nature of political connection (D72) | Effect on stock value of connected firms (G34) |