Working Paper: NBER ID: w25136
Authors: Ufuk Akcigit; Salom Baslandze; Francesca Lotti
Abstract: How do political connections affect firm dynamics, innovation, and creative destruction? To answer this question, 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 generates a number of theoretical testable predictions and highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. We test the predictions of our model using a brand-new dataset on Italian firms and their workers, 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.
Keywords: Political Connections; Firm Dynamics; Innovation; Creative Destruction
JEL Codes: D70; O30; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political connections (D72) | firm dynamics (D21) |
| political connections (D72) | innovation (O35) |
| politically connected firms (G38) | growth in employment (O49) |
| politically connected firms (G38) | growth in revenue (O49) |
| politically connected firms (G38) | survival rates (C41) |
| politically connected firms (G38) | wage premiums (J31) |
| winning party connections (D72) | firm growth (L26) |
| losing party connections (L14) | firm dynamics (D21) |