Working Paper: CEPR ID: DP15612
Authors: Thomas Lambert; Wolf Wagner; Eden Quxian Zhang
Abstract: We show that politically connected banks influence economic activity. We exploit shocks to individual banks’ political capital following close US congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy rather than increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.
Keywords: campaign contributions; close elections; corporate lending; creative destruction; economic growth; political connections; productivity
JEL Codes: D72; E65; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive shocks to banks' political capital (F65) | Increase in regional output growth (O49) |
| Positive shocks to banks' political capital (F65) | Eased lending conditions (G21) |
| Eased lending conditions (G21) | Increase in lending volumes for riskier firms (G21) |
| Positive shocks to banks' political capital (F65) | Lower interest rates (E43) |
| Positive shocks to banks' political capital (F65) | Temporary growth effect (O41) |
| Temporary growth effect (O41) | Vanishing after one year post-election (K16) |
| Political capital (H54) | Supports existing firms (L26) |
| Political capital (H54) | No significant effect on job creation by new entrants (L26) |
| Political capital (H54) | No enhancement of productivity (O49) |